Asia: New Axis of Reform
Comment of the Day

June 10 2014

Commentary by David Fuller

Asia: New Axis of Reform

Here is the opening from this topical column by William Pesek for Bloomberg:

Asia's three biggest economies are suddenly experiencing a burst of change that could alter the growth trajectory for the world's most populous region. Are we seeing the birth of a new "Axis of Reform," one which could revive the global economy? 

China's Xi Jinping, India's Narendra Modi and Japan's Shinzo Abe are simultaneously sketching out vague-but-promising plans to revitalize their rigid economies. It's not a coordinated process -- more of a serendipitous coincidence, driven by a dire need for change in all three nations. Still, the possibilities are enticing: A truly dynamic and innovative Asia would raise living standards for billions and fresh hope for a world wondering where all its big growth engines went.

David Fuller's view

Subscribers will have observed that economic development is not a consistent long-term process.  Eras of dynamic and inventive outperformance are eventually followed by periods of complacency and speculative excesses.  There will be various and occasionally exogenous contributing factors to these cycles but a reoccurring influence will often be variations in standards of governance.  This is a top-down process, starting with national governments and extending to regional, corporate and individual governance. 

Similarly, improvements in economic development following a period of underperformance usually commence with positive changes in national governments which extend to regional, corporate and individual governance.  These cyclical changes occur in all countries but are most pronounced in the fortunes of both developing and frontier nations. 

The “serendipitous coincidence” of needs-must changes in economic governance for Japan, China and India is certainly welcome and remains a very interesting situation for investors who are not daunted by the potential volatility of these three stock markets.  They are also three important and varied test cases for Fuller Treacy Money’s mantra: Governance is Everything.

I remain optimistic that Shinzo Abe’s economic regeneration programme is still on track.  There are inevitably plenty of doubters and many uncertainties ahead.  Nevertheless, Japan’s latest GDP figures suggest that the sales tax introduced earlier this year has not stalled the economic recovery.  Investors have been understandably asking questions, not least since the explosive initial rally peaked over a year ago.  The Nikkei 225 (weekly & daily) rally over the last three weeks has reaffirmed support near 14,000.  I mentioned that it was temporarily overbought in Monday’s Audio and a reaction and consolidation appears to be underway.  If the Nikkei can hold most of the recent gains during this pause, we should see a retest of last year’s highs near 16,000 within the next few months.  Japan remains competitively valued, at least in terms of book value, and I maintain that this lengthy pause will support another significant advance over the next year or two. 

China remains the most enigmatic of these three Asian stock markets, in my opinion, and it has been a serial underperformer in recent years, at least in terms of the Shanghai A-Shares (weekly & daily), where banks are the dominant sector.  It is extremely difficult to predict when a lengthy ranging pattern will produce a breakout.  Nevertheless, I assume that the next big move will be to the upside, not least because valuations are low and China’s economy is still growing.  Upside dynamics on the daily chart above suggest accumulation.  Clearly, extensive reforms are underway in China and investors’ patience is justified by the lowest valuations of any liquid stock market, not least one with China’s GDP growth potential.  Consumer sectors have `dominated performance in China over the last few years and this is reflected by the Hong Kong Hang Seng Index (weekly & daily), which should at least challenge highs of the last two years near 24,000 within the next few months.


In terms of governance, India is by far the most exciting story following Narendra Modi’s stunning majority victory last month.  Investors have taken notice, as we can see from the strong rally since Modi announced his candidacy.  Most commentators are still cautious because of India’s myriad and mostly bureaucratic problems.  What a platform for an economically savvy prime minister who is a proven effective leader and also has the common touch!  Given its population size, there is more untapped potential in India than any other country.  Consequently, I would not be surprised to see the Mumbai Sensex Index (weekly & daily) repeat its advance from 2003 through 2007 during the next five years.

You may be interested in this article: When Rajan Met Modi.    

As an aside, it would be nice if we could see some pro growth economic reform from the European Union.

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