2002-era valuations do not herald a bull market for GEM equities
Comment of the Day

February 28 2013

Commentary by Eoin Treacy

2002-era valuations do not herald a bull market for GEM equities

Thanks to a subscriber for this interesting report by John Paul Smith and Priyal Mulji for Deutsche Bank where they express a bearish opinion on BRIC and South Africa. Here is a section
DB China economist and strategist, Dr Jun Ma, has consistently said that the reform agenda will not take shape until the formation of the new State Council in March. Nevertheless, he has expressed scepticism that the new leadership will be able to implement much in the way of real change in such important areas as SOE reform and the relationship between Beijing and local governments. We believe that two very important areas to watch are rural land reform and fiscal reform in order to optimise the economic impact of further urbanisation, and to promote a more rapid rebalancing of the economy away from excessive levels of fixed asset investment towards consumer spending. Both of these reforms would require a Herculean effort to overcome vested interests and ideological obstacles as DB senior analyst Michael Spencer pointed out in a recent report. The most likely scenario is for a series of piecemeal measures, which in our view are unlikely to suffice to head off the structural problems, which threaten to bring the future rate of growth much lower. We are similarly pessimistic about the so called anti-corruption campaign, which appears to be addressing relatively superficial issues such as the number of courses in official dinners, rather than the blurred boundaries between the state and private sectors, which are the real cause of rent seeking and the inefficient allocation of resources in our view. It is probably significant that there has been a very high degree of opposition to measures to introduce a property tax, much of it reportedly from government officials with multiple properties.

Eoin Treacy's view “Governance is Everything” has long been a mantra at Fullermoney. China has made massive strides in embracing a capitalist economic structure over the last three decades; focusing on infrastructure development and export growth. However if standards of living are to continue to improve in the manner Chinese citizens have become accustomed to, a continuing upward trajectory in standards of governance is essential. Tackling corruption, reforming the banking sector, broadening the tax base, fostering the consumer sector, strengthening the social safety net and improving access to healthcare are all needed if China is to retain its growth momentum. (Also see David's comments on China above).

This report focuses on five of the heavyweights in the emerging market space; China, India, Brazil, Russia and South Africa. With the exception of India, the authors argue that increased government intervention in markets, strength of their respective currencies and significant rallies in their government bonds over the last decade reduce the chances that these markets will outperform in future. This is a reasonable assumption if the pace of reform stalls.

What is perhaps more interesting is that there is a region where we can conclude that the consumer sector is flourishing, governments are generally reducing interference, the corporate sector is improving and debt levels are low. This is ASEAN and helps to explain why it the region's stock markets have been such outperformers over the last four years.

Back to top