Mellon on the Markets: The pivot to Asia

“Any fool can make a fortune. It takes a man of genius to keep it after it’s made.”

– Cornelius Vanderbilt 

I’m writing this on an old BA 747 (there aren’t any new ones!) flying to San Diego to speak at the RAAD fest ageing conference. I think about 2,000 people are attending. I am honoured to be doing this, as the other keynote is Ray Kurzweil and I am super excited to meet him. He is a very singular man!

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This is the second long trip in a week, as I recently returned from Singapore, where I was on a couple of panels at the Milken Asia Summit. This was very interesting in itself, but, as an added bonus, my colleague Anthony Chow and I got to spend a day at the National University of Singapore (NUS), which is a world class institution with some really interesting medical technology that we are looking at investing in.

We also met with some investors, Singapore now being a major hub for wealth management. In fact, anecdotally, I was told that the city state has more money under management than Switzerland!

Nothing is more demonstrative of the pivot to Asia in terms of relative wealth creation than that. Yes, there is still a strong economic and stock market linkage between the US and Asia, but this is slowly weakening. The rise of China, albeit with its somewhat imperfect economy pro tem, is one feature of this, but, of course, there is so much more going on than that. Singapore, as an example, has a GDP per capita which is roughly twice that of the UK, with no resources other than position, harbour and, of course, a remarkably well-educated labour force. Everything about the place hums, with the metro running like clockwork and spotlessly clean and the airport a triumph of efficient design.

Contrast that to the shocking state of the Tube in London or the subway in New York. I did and was ashamed on behalf of me and my compatriots.

Asia’s century

I lived in Hong-Kong (another remarkable success story!) for twelve years, so I guess I should be used to the dawning of the Asian century. In about thirty years, the whole place has been transformed, and whereas most Far-Eastern nations are now middle-to-high income (the outliers being the Philippines and Indonesia, both of which are catching up), India is the next great frontier and no doubt will be scaled up over the next two decades to something quite unrecognisable.

The reason I mention all of this is because Asian markets (with the exception of Japan) have been generally weak in the past year and now sell at much lower valuations than US markets – and indeed even some European markets.

The Chinese markets have been particularly pummelled, to the point where they look (stripping out the internet stocks) positively cheap, at about 7x prospective earnings. This is despite all we know about a looming trade war, a deteriorating current account position and excessive debt, particularly in local government and state-owned enterprises. I have been buying ETFs in Chinese financial institutions, and one investing in industrials as well, and because Indonesia also looks very cheap, I have been buying there also.

Japan has been very resilient, in my opinion. The multi-year high reached in January of this year will be easily breached in the next couple of months and there is almost no currency downside to the yen, which I think is very cheap. Equally, everything about Japan looks good now; corporate governance is much improved, earnings are up, inflation is percolating a little, dividend yields are quite good, and stocks are relatively cheap. I have been banging on about Japan for a while – my instinct is to hold, even if elsewhere clouds are darkening somewhat.

Pockets of opportunity

Broadly, as regular readers know, I am sceptical of much residual value in the US market. There are of course pockets of opportunity, but I can see that although new highs on some indices are being achieved, the breadth is limited, the pace of change looks exhausted, and the market-beating FAANGS are absolutely behind the pace at the moment.

There are also reasons to be concerned about the broad macro picture in the US. Yes, President Trump is on a roll, with the economy seemingly booming; but we now have quantitative tightening happening in the US, we have soaring public and private debt, rising interest rates, full employment leading to wage pressure – oh, and a trade war, which can be in no-one’s best interest.

I think it is important to recognise that we are in an exceptionally long-lived bull market and economic upturn and that the recent poor performance of banking stocks probably signals something bad is in store for us.

I am aware that a mantra of diversification – some dividend yielding stocks, some emerging markets and some currency plays – is boring after a while, but it’s what we need to do.

Meanwhile, closer to home…

Closer to home, what about the UK? I believe a soft Brexit is about to be agreed, which suggests to me that sterling is a buy and investors should position accordingly. I think UK stocks, especially domestic ones, are a little undervalued and bonds are overvalued. There are few that cry out to be bought, but maybe the oil majors, including BP (LON:BP.) and Shell (LON:RDSB), merit attention.

In Europe, I think that Bayer (ETR:BAYN), recently fried by an ill-timed purchase of Monsanto, might be looking good, but it’s worth averaging-in.

Commerzbank (ETR:CBK) is very likely to be bought by Deutsche Bank (ETR:DBK), in a case of the blind leading the… This will be an initiative of the German government, which presides over a generally very poorly managed banking sector. Wait till Italy hits the proverbial and see what happens then! But for those of us who like short-term gains (and who doesn’t?!), Commerzbank looks like an interesting situation. And I know nothing more than what I read in market commentary!

Unilever’s (LON:ULVR) attempt to move to Holland is an absolute disgrace; it seems designed to help it fend off another attack a la Kraft, and I must say I do hope my ex-colleague Nick Train sees off the injudicious move. There’s no real money in this trade though.

I will be backing two new exciting companies soon and in my next missive I will expound on them. I hope everyone has noticed the amazing articles that Master Investor is generating fervently. Aubrey de Grey is incredible and well worth reading.

Also, of course, we have the Longevity seminar for MI clients coming up soon and he will be there. I admire him as much as anyone and can’t wait for the day.

Live long and prosper.

Happy Hunting!

Jim Mellon