The single greatest economic story of our times – let’s define that as the last thirty years, although there are some readers who will take that phrase as a reference to Queen Victoria, and others to FDR – is the rise of China. Literally hundreds of millions of people have been lifted out of poverty, so that the Chinese ‘economic miracle’ that is commonly dated from 1978 is on a scale that dwarfs any other, whether in Asia or elsewhere.
Not surprisingly, many foreigners have sought to jump on the Chinese bandwagon and get rich along with China – yet remarkable few have succeeded. Most of those who made the effort to go to China and create or buy into companies there have fallen victim to one or other of the common Chinese economic maladies, namely being cheated by your local partners, having your IP copied and/or pirated, being blocked by the bureaucracy (central or local government) or otherwise discriminated against. These victims include many of the largest multi-nationals and many more small firms and individual businessmen and investors.
But even people who took the lazy way out and simply tried to invest money in Chinese firms traded on stock exchanges, have found it hard to ride the Chinese dragon and alight safely, profits in hand. A Bloomberg story earlier this week marked the twentieth anniversary of the opening of an investment avenue into China via the Hong Kong stock exchange. During those twenty years, China has grown at a stunning pace and has become, in many respects, an advanced country. Yet the story illustrated how little the smart money that rushed to participate in this growth when the opportunity was awarded had to show for its 20-year sojourn in the Far East: if you bought and held in Hong Kong for 20 years, you are up about 1% overall. Even today, few people who would have guessed that the result would be so very disappointing; US Treasury bills were a much better investment….
The message contained in this anecdote is that there is remarkably little connection between GDP growth and stock market returns, at least on the upside. A country can achieve remarkable growth over many years, without that necessarily translating into a boom in equities. For one thing, there must actually be a stock market, preferably one that offers liquidity and contains a fairly broad selection of interesting companies. A homegrown example: the Israeli economy grew at 10% per annum for 25 years, from 1948 through 1973 – a feat matched in that post-war generation only by Japan — but the local stock market only got into the act at a late stage, and was too small to allow any meaningful participation even by local investors (such as they were, at that time), let alone foreigners (who, by and large, wouldn’t touch Israel).
The China story is looking especially threadbare this year, as this column has noted several times. But that is just part of a wider phenomenon, in which the entire concept of investing in emerging markets (EM) has fallen apart. The ‘BRIC’ countries – a term coined some twelve years ago by Goldman Sachs’ Jim O’Neill for the four large and seemingly most-promising economies in the ‘EM universe’, namely Brazil, Russia, india and China – have all gone sour more or less simultaneously, although not for the same reasons.
China has a host of problems that are forcing it to grow less quickly – and, some fear, its growth rate will drop much further. This has exposed the fact that Brazil’s surging growth over the last decade was based primarily on exporting raw materials to the rest of the world, first and foremost China. Russia’s economic boom was always a raw materials story, with oil and natural gas heading a long list of items that Russia exported to a commodities-hungry world. India was a quite different case, underlining how little these countries had in common and how badly the BRICs fit together, even before they started crumbling.
But the key thing they had in common was that, thanks to people like Jim O’Neill and the other cheerleaders of the EM mania, Western money poured into them on a huge scale. The result was that they all rose together and they are all falling apart together. But the real story will be which of them will be able to recover and mature into slower-growing but more stable economies. The current period of decline and slump provides the opportunity for the real smart money to do some homework and find countries and companies that have a positive long-term outlook and that offer real opportunity to outside investors.