Tokyo 2020: An all-over confidence boost

And its congratulations to Toyko; commiserations to Madrid and Istanbul 

IN CASE you haven't heard the news,  earlier this week, Tokyo was selected by a majority vote to become the host city of the 2020 Olympic Games. Sure, its seven years away but the Games have already had a positive effect right from the moment of announcement. The Topix Index rose 2.2% and unsurprisingly, winners were construction,  tourism and real estate companies. The biggest performers included Taisei Corp, a building firm expected to play a role in the Games' infrastructure, who rose by 14% on the day of the announcement. This rally is of course short-lived, but the shares of companies in real estate, infrastructure, construction, transport, tourism and retail related to the Games are valuable equity to hold overall - I see growth in these. Coupled with 'Abenomics' (read about it here), the Olympics is something that will boost consumer confidence and their mood, the optimism of investors and output. It is a force that will help halt Japan's two decades of deflation. You could say that Tokyo 2020 is the fourth arrow of Abenomics. It has been predicted by Japan's bid team that the Games will create 150,000 jobs in Japan and generate $30 billion. The government estimated that an additional 0.3% of GDP will be generated. This is quite a modest amount and I believe it will be more similar to that of the UK's, at 0.6%-0.7%.

The Olympic Village will be in close proximity to Tokyo Bay, which has seen its share of problems over the past 20 years such as abandonment and deflation of property prices. With the Games, I see property price in this area rising a considerable amount due to rejuvenation - influx of people, businesses, shops, transport, parks, stadiums -  into the area, just as Tokyo 1964 turned the wasteland of Komazawa into an Olympic Village and then into a trendy neighborhood in central Tokyo. An example closer to home would be Stratford. The development of Tokyo Bay will benefit landowners - prominent corporate owners include Mitsubishi Estate and Daiwa House Industry who have already seen their stocks rally. From the property developers and real estate side, I suppose they are also eager to make Tokyo become a hot property market in Asia again. 

In the next post: I will discuss some recent M&A deals that have interested me

JH

Beyond the BRICs: the 'Next 11' and even further beyond

ONE THE eve of my graduation (when I was supposed to be ironing my clothes for it), I opted to attend a talk by Jim O'Neill at my university. You probably have heard of him before, but he is the recently retired Chairman of Goldman Sachs Asset Management and the famous coiner of the BRICs acronym - the 4 emerging market giants of Brazil, Russia, India and China. Entitled ' The Changing World: an overview of dynamic and adapatable capitalism in a world beyond the BRICs', his talk of coure focussed on the BRICs but also shed substantial light on the 'Next 11' or 'N-11' - the 11 countries to watch out for as they make make their ascent towards wealth and full industrialisation, all with the potential of becoming the largest economies of the 21st century and the BRICs of tomorrow. 

These include:

The BRICs of tomorrow?

And notably, the 'MIST' (Mexico, Indonesia, South [Korea] and Turkey) nations make up 73% of the total of the N-11's GDP. 

For people my age and younger, it is all very easy to get excited about the BRICs, MISTs and the N-11 knowing that these nations will have increasing influence on our lives, no matter where we are in the world. The thing about emerging markets is that despite several commonalities, they are all different. The differ in area size, population size, rates of growth, patterns of economic reform, political, economic and legal regimes and styles of government which may pose as a threat or opportunity for investors. For example, you can probably tell from the word cloud that some N-11 members are far more industrialised than others already. 

South Korea aside (being an already highly developed nation), I believe that Nigeria, Philippines, Indonesia, Mexico, Turkey and Vietnam are the best positioned to grow into the largest economies over the next 30 years+. I have chosen a few countries to blog a some quick words about...

Nigeria, being the most populous nation in Africa and the 7th most populous country in the world, still faces huge challenges including poverty, some corruption, poor infrastructure and power supply among its 170 million people. However, for the past 6 years, the country has grown at an average 7%. Its large and young workforce means productivity won't be in short supply, attracting investment from both home and abroad. Sectors within each country grow at different rates and thus offer different opportunities for growth. Sector-wise, I know the food & beverage sector here is very vibrant at the moment and is projected to grow into the coming years, mainly driven by a wealthy middle class ready to consume with increasing disposable income. Energy is the hottest sector there (no pun intended), and still will be in the next coming decades with the oil and gas resources attracting international investments particularly as more state owned power and oil companies are set for privatisation. The banking sector is another industry ready for growth, having undergone extensive regulatory and restructuring.  

Whilst growth and attracting FDI or home investment is likely to be the top of the policy agenda for Nigeria's current and successive governments, I believe that solving the social and infrastructure related challenges faced by the country should certainly receive near equal status as part of the path to growth into an international economic force. 

Philippines, has an educated and young work force which I believe is a blessing given this characteristic cannot be replicated so easily in other countries also competing for investment and growth. Philippines is a strong exporter of electronic products, garments, petroleum products and fruits and they can continue to hold this status in the next coming years. Philippines, only very recently has become a popular destination for foreign investment given that its credit rating was raised to investment grade by Fitch and S&P not so long again. Bullish growth was a cause of this, but also due to President Aquino's rather successful bids to tackle corruption; now, there is a shift towards transparency creating more confidence among foreign investors. 

Corruption is still widespread nevertheless, and if Aquino and success governments can push for more anti-corruption measures and policies for welfare improvement, Philippines will see more investment and growth as investors tap into the work force and into the ever growing middle class. 

Indonesia, is a country I am often guilty of confusing it with the Philippines. These two countries have many commonalities but also a lot of differences. Indonesia is the world's 4th most populous country and has the largest economy in South-East Asia, with a growth rate of 6% per year. There is a thriving banking sector, with many local private equity and investor setting up, with more opportunities for growth in both banking and private equity well into the future.  The country has a large and young work force which creates an excellent source of productivity. Low wages in the country also make Indonesia an attractive destination for manufacturers  The most attractive point about the country is its 'open door' policy towards investment, where it actively welcomes investment and simplifying the legal framework (from the 1980s) to do so. Given that it is a democracy, it is also fairly easy to move money in and out of its borders (in comparison to China, for example). However, unlike the Philippines  the work force is not as educated and thus investors have trouble finding suitable management here. Therefore, should policy makers focus on improving its primary-tertiary education system, possibly modelling it on the Singapore or Filipino systems,  Indonesia could be become a serious magnetic force for attracting global investments. 


Vietnam, is an exciting place I feel as while it is a developing and generally agrarian economy, it is one which is shifting from a centrally planned economy into a more market orientated one. GDP growth is around 5%, and there is a lot of M&A activity and FDI in the country, particularly in manufacturing related sectors as suppliers seek a lower wage market as China and other Asian economies experience wage inflation. I expect Vietnam to be a major exporter of agricultural and food produce. As trade links improve with the rest of the world, the food and beverage industry could be a strong target for investors. Aside from the growth of manufacturing ( food processing, cigarettes, garments chemicals, and electronic consumer goods), I expect the tourism industry to grow as the Vietnam National Administration of Tourism is implementing a large scale diversification of the tourism industry to attract foreign exchange (as well as attracting more tourism). This sector therefore offering investment opportunities for local investors and those from further afield. Like several other N-11 members, Vietnam however faces the challenge of tackling corruption and providing experienced management due to its young population. 


With regard to Bangladesh, the country faces several large challenges that other N-11 countries do not face. Over population is the main issue which contributes to a largely uneducated country with widespread poverty. The tragedy of the garment factory incident and a general lack of regard for industrial safety reminds us that Bangladesh has a lot to do, although some action is slowly being taken. Time will tell if these actions are prolonged.  Out of all the N-11 nations however, Bangladesh has the one of the biggest opportunities to grow. Currently, although investment activity is nascent, there is growing interest in the country due to the large work force and the expanding economy (at more than 6% per annum) coupled with a growing middle class and their ever-growing disposable income. It is only ranked second to China in clothing exports, and will this industry will gain momentum into the future years as manufactures seek to move away from China into lower wage economies such as Bangladesh; it is one of the cheapest places to manufacture. 

There are high hopes of Iran and Pakistan as they are one of the largest producers of natural commodities in the world. Political and foreign policy challenges in both countries however will detract Western investors. Nevertheless, I believe we will see a thawing of relationships between the US/Europe with Iran and Pakistan over the next coming decades; Iran 's new leadership could pave a way for nuclear disarment and building a relationship with the US. As the 'war on terror' ends, Europe and USA could focus on strengthening a business and commercial partnerships with both countries. 

*****

Jim O' Neill's talk also made me think outside of the box a bit. What nations are beyond the BRICs and the N-11 to challenge the G7 of the world then? Will these nations be the emerging nations of the world when I'm spending my days playing bridge and bowling on greens?

This is very difficult to say many countries can potentially fit into this category and as for each country,  a whole host of social, political and economic factors and risks will come into force throughout my lifetime. At present however, to take a few, I believe Mongolia could fit into this category. As can Kazakhstan, Angola, Zambia, Botswana and Iraq. I've created a mind map of my thoughts as this post has been pretty wordy and long already. Take a look (click to enlarge)...

JH

Britian's new banker

HELLO ALL, 

This post will be a fairly brief one as I am currently quite busy organising graduation stuff such as clothes and shoes (being a girl and all..), but I promise a more in-depth analysis on the next topic is coming very soon!

*****

So if you're living in Britain, and if you read any news online or newspaper, it will be impossible to miss that Britain and it's central bank is about to experience a significant change-over. After 10 years of holding the position as Governor of the Bank of England, Sir Mervyn King (now Lord King) will step down and Canadian Mark Carney, currently the Governor of the Bank of Canada, will officially replace Lord King as of next Monday. 

Carney's total annual benefits package, including salary, housing allowance and pension contribution is at a very generous £874,000, more than that of Meryvn King. This more than generous figure reflects George Osborne's efforts to woo a once reluctant Carney from Ottawa to London, and also that Carney may just be worth it. After all, no one get's called a "financial rock star" or the "George Clooney of central banking" for no reason. 

And I for one, believe that Carney can bring fresh thinking and perspectives at the Bank of England. This in turn, can lead Britain on to a stronger and long lasting path of growth and employment. For example: 

Carney was the governor of the Bank of Canada throughout the financial crisis. Canada, unlike most other industrialised nations and G7 countries, was weakly affected by the 2007-9 episodes in comparison. Its banks also did not need to seek government bail-outs. Carney has been described as "effective" and "helpful" during this period and his clear record of success, which not many central bankers can claim, is certainly reassuring to Britain - we can look forward to a replication of such success over the next 5 years. 

And given that Canadian banks are relatively conservative, risk-averse (only 5% of Canadian mortgages were sub-prime) and more willing to lend especially during the crisis due to a better managed banking system comparatively to US and UK counterparts (which is another reason Canada remained generally unaffected), Carney is also likely bring this conservative ethos or even related reforms into Britain's banking system. Carney's past as a banker (of Goldman Sachs) can help him to leverage any policies related to reigning in banks to banks' management - he effectively understands how such policies could be at a huge cost to banks' profit and capital structures, inevitability affecting contribution to national GDP. At the same time as a central banker, he can engage in a viewpoint for the good of the general economy. 

Further, there is some heavy hinting that Carney will adjust QE packages to revert to the 2% target inflation in order to achieve GDP growth. Could we finally see a interest rate increase? I believe so, but not immediately. Radical changes is likely to attract opposition from Carney's colleagues of the Bank. 

So while monetary policy, fiscal policy or other structural banking system changes won't be immediate, he has already brought in 'new thinking'  and a new tone of communication by appointing key staff. Those among several include a female banker - Charlotte Hogg - for COO and Jeremy Harrison, Carney's current press spokesperson from the Bank of Canada. 

And of course, Carney's new job is no easy job as he himself has recognised. I can think of a handful of challenges and big 'to do' things on his list:

• Monetary policy - more QE with the £375 billion available? Or raise interest rate? Or both?
• Supporting a path of higher and longer lasting GDP growth. How to effectively do so?
• What to do about a ~2.7% inflation rate, or a ~7.8% unemployment rate? 
• How to reform the banking system, beyond incoming regulatory changes such as Basel III or Dodd-Frank?
• Assessing effectiveness and managing the newly formed PRA.
• Undoubtedly playing a role in the near-future privatisation of RBS and LBG.
• How to reform the Bank of England itself? Only 35%-40% of British households are satisfied with their central bank at present. 

Obama was hailed very much as the 'messiah' of political change probably after the Bush years were so dark and also for being the first black president. Carney has certainly been portrayed as a face of change, but to a much less extent than Obama. The next 5 years under Carney will be different and possibly exciting. How different it will be and whether Carney will really deliver remains to be seen. I don't expect radical changes over the next few months but his style will bring in a new culture at the Bank of England to start with. We can only look forward to the August MPC meeting - the first under Carney - and also Carney's first quarterly inflation report. 

The 2Cs that lie ahead for Mark Carney 

JH

President Xi's 'Chinese dream'

I RECALL that the front page of 'The Economist' in early May (last month) was a rather amusing one. It was a clever illustration of Chinese President Xi Jinping, as an imperial Chinese emperor sporting some 'modernised' golden robes, a glass of champagne and a party popper that is said to have deeply offended the Communist Party: 

©The Economist

The headline was even more amusing: "Let's party like its 1793", alluding to more glorious times for China, where the country's GDP represented a third of the world's total (now represents 11%; represented 5% during mid-20th century). This triumph was not long lasting. China underwent 'the century of humiliation' that involved foreign invasion, occupation and immense suffering to Chinese citizens in their homeland, then an interim of civil war between the Communists and Nationalists and finally Maoism, where economic policies under Mao failed spectacularly - abject poverty was prevalent and tens of millions died of starvation as a result. But China, now the world's second largest economy after the USA, managed to turn itself around in 1978 beginning its path to modern economic glory under Deng. Deng's motto was in fact, "to get rich is glorious". 

This economic progress has seen hundreds of millions of the peasant class lift themselves out of poverty and another hundreds of thousands becoming a wealthy middle class citizen. China's GDP boomed and expanded by 7-15% per annum since Deng's 'open door policies' began. China's is continuing to grow at around 6-7% despite the challenges of the current global macroeconomics. Nevertheless, all this is not quite enough for Xi.

The Chinese Dream 

(Political) slogans are big in China. Xi, who took office in March 2013 recently launched his slogan as the 'Chinese dream'. And no doubt even in the West, we will be hearing these two words over and over again as Xi progresses deeper into his ten year rule. Xi's slogan is a play on the 'American dream'. But unlike the American dream (that anything is possible with hard work), the definition of the Chinese dream is more blurred partly because of the overt political spin: 

"national rejuvenation, improvement of people’s livelihoods, prosperity, construction of a better society and military strengthening...that young people should dare to dream, work assiduously to fulfill the dreams and contribute to the revitalization of the nation...the Chinese dream is about Chinese prosperity, collective effort, socialism and national glory"

To me, at its basic meaning, the Chinese dream is about reverting and rejuvenating the country back to its former 1793 glory. It is understandable that in a country with a proud 5000 year civilization and one with a century of humiliation and pain, Xi (and also undoubtedly Chinese people) wants the country to rise strong again. Thus, the Chinese dream emphasises collective efforts and uniting Chinese citizens to achieve so. 

With effective propaganda and in a country where slogans matter, it is little surprise to me that the Chinese dream notion is big in China already. Firstly, Xi's doctrine of the Chinese dream and even the concept of 'dreams' has  hardly been out of national newspapers and the general media. 'Dream walls' have appeared in universities and public spaces for people to share their dreams and hopes for the future. Research into the 'Chinese dream' by the Chinese Academy of Social Sciences is due to be undertaken and believe it or not, the slogan has even inspired a chart topping song, entitled 'Chinese dream'. These effects are probably a passing fad but I for one, am concerned about where this dream can take China. 


Dreams fulfilled or nightmares created? 

The launching of the Chinese dream took place with an exhibition entitled the 'Road to Revival' at the National Museum next to Tiananmen Square, Beijing. A display of the oppression of Chinese people under colonial powers in the 19th-20th century and the (continued) restoration of China under communism in 1949, the exhibition is designed to evoke strong senses of nationalism. There is nothing wrong with nationalism and also nothing wrong with Chinese nationalism but given that both this centrepiece launch and that the Chinese dream itself is founded on nationalist principles, there is a real danger for China of losing sight of solving internal problems and instead focusing all efforts on battling for world domination. 

Further, whereas the American dream focuses on the individual and achieving individual wealth, the Chinese dream is focused on achieving national wealth thereby aggregating over individuals. The trouble with this is that the poorest or those citizens who are not benefiting from growth and national wealth, are not helped, much like the present situation.  

With the slowing economy, widespread and (increasingly reported corruption with the likes of Weibo), graduate unemployment, food safety scandals, pollution (a solution to these are far more likely to be the actual dreams of Chinese people), it seems like this slogan launch is plausibly an effort for Xi to win over some public affection and popularity for the time being. Xi, known for being straight talking and a 'man of the people', should have taken this opportunity to address directly and in plain language the real dreams and hopes of many Chinese people as individuals and not collectively as a nation. Doing so could leave Xi the same level of legacy akin to that of Deng. 

In the meantime, despite all the fuss, there isn't that much detail or policy unveiling on how Xi will go ahead to fulfill this Chinese dream. Apparently it will be fulfilled by the mid-21st century. It is not clear whether this means China becoming the world's largest economy or becoming a nation with the most advanced army, or even if Chinese Mandarin will become the new international language. Whether Xi can do so remains another interesting question. If Xi can successfully do so, the Communist Party would enjoy its cling on power for longer. But this Chinese dream, given it has no sincere objectives to benefit the individual, and that Chinese people are growing increasingly dissatisfied with pollution, corruption, social injustice and food safety scandals, won't this Chinese dream spark a wave of eventual backlash against the party who should be given credit to make China the way it is today? 

Finally, the Chinese dream very much also has a goal of revival to the past, to what China sees as its rightful position on the international stage. The Chinese dream is flawed because it should be a consideration of the future and the new challenges present and ahead in China's bid to become the greatest nation of the 21st and into 22nd century...and beyond?


JH

The 2010s for Japan: comeback like Sinatra or lost decade round two?

The future: the volatile road ahead for the world's 3rd largest economy.

JAPAN, LIKE a phoenix rising from the ashes, ascended from its knees after the Second World War into one of the world's major economic superpowers and industrialized nations in a generation. By the mid 1970s - early 1980s, Japan had effectively 'caught up' with the USA and Europe technologically and economically, especially in its key export sectors of ICT, automobiles, consumer electronics and other heavy industry. Its conglomerates posed as a major threat and competitor to Western counterparts. But unlike its Asian neighbours of South Korea or Taiwan, Japan never fully managed to shake off the detriment of the bursting of the bubble in the early 1990s, the Asian financial crisis of 1997 and the collapse of semiconductor prices at the end of the 20th century. The fact that many Japanese firms are particularly dependent on the domestic Japanese market (such as firms in the telecommunications and semiconductor sectors) also exacerbates the problem for them. 

From an economics perspective, the central bank  - Bank of Japan  -  was partially to blame. Interest rates still remained high during the late 1990s and Bank of Japan's failure to lower the interest rate fast enough resulted in a liquidity trap - a cause of stagnation. In an attempt to stimulate the economy, Japan (unsuccessfully) during this period of time ran into large budget deficits on public works projects. Japan then suffered several episodes of deflation into the new millennium; the success of Bank of Japan's quantitative easing program which began in 2005 only proved to be short lived as far as GDP growth figures of the period show.

The 1990s, what was in fact an American decade, was the lost decade to Japan. The country, which exhibited miracle growth was now in a state of crisis and decline. 

Fast forward to 2013, little has got better for Japan overall. 

This week, Japan's economic woes has been hitting the financial press headlines again. At the beginning of the week, the Bank of Japan after a 2 day meeting announced that it will implement no new quantitative easing, other monetary policy tactics or offer bond buys. Disappointed and left volatile, the Nikkei fell 6.5% entering a bear market territory while global markets also responded negatively to the news; markets were further not convinced by Bank of Japan's governor Kuroda's insistence that growth is coming and that no imminent tool is needed as a result. The yen rose nearly 2% against the dollar. It seems to me that Japan's lost decade is far from over. 

Could 'Abenomics' give Japan a comeback like Sinatra? 

PM Shinzo Abe, who came into power last year, is an advocate of going 'all out' to stimulate economic growth, private investment and battle the Japanese economic plague that is deflation.  His vision, consisting of the 3 arrows approach -  dubbed as 'Abenomics' -  involves the Bank of Japan playing more of a monetary policy role. It is also entails more fiscal policy moves including heavy government spending and the Bank of Japan engaging in aggressive  asset buying. The third arrow involves structural reforms, seen as the foundation to Japan's comeback. Abe believes that the mobilisation of an aggressive monetary policy and fiscal policy will stimulate growth, triggering a round of private investment into plants and people. In turn, expectations of growth and prices will start to rise, successfully combating inflation. 

Since a landslide victory in November 2012 that resulted in Abe becoming Japan's 6th leader in 7 years, Abe has been following through with what was on his manifesto. He forced through a 10 trillion Yen increase in government spending on infrastructure  healthcare, education and other spending- this is believed to boost Japan's growth by 2%.  This week, Japan's cabinet is voting on the '3rd arrow policies' under 'Abenomics' involving income raises, attracting foreign investment and a reduction on investment tax to help companies boost their capital spending. 

But, the Bank of Japan's actions, or rather, lack of actions this week does not concur with 'Abenomics', casting some doubt on whether 'Abenomics' is actually plausible in reality. 

Of course, it is too early to judge the long term effects of 'Abenomics' and whether any growth (such as the 1% growth of Q1 2013) is here to stay. 

Looking holistically, the Nikkei has gained more than 70% since mid-November and the Yen lowered by 22% to the dollar and the euro. Also in this time period, the difference in yields between 5-year Japanese government bonds and their inflation-indexed equivalents has increased by over 1 percentage point. This could be indication that Japan is on an overall path to growth and inflation, leading to a rebound in consumer spending, hiring and other private investment.  Further, earnings predictions for Japanese firms are higher than compared to 6 months ago, but only based on the belief that Japan's GDP figures will continue some form of growth. 

For the Japanese economy, inflation is good news. There has been a surge of inflation in recent month, but this is actually driven wholly by a planned increase in consumption taxes that will begin in 2014. Similarly, data from the Tokyo Stock Exchange shows that the Japanese have been selling shares to foreigners for months. For me, this would say that any inflation/price increases is due to foreign demand and not changes in the the portfolio allocations of Japanese savers. 

Another point to suggest that there has been no real economic progress (since Abe's election) is that Japanese households and firms, who own more than $6.7 trillion worth of non-Japanese assets (37% are bond investments), are not moving their money out of these foreign assets into domestic ones. They would surely do so if Japanese savers genuinely believed that Japan's prospects had improved. A lack of investment by foreign investors in Japanese assets is also a sign that Kuroda and Abe are not convincing many. 

To me, Abenomics has not made a modest reversal, but a minute one. This is because what is needed is more fundamental structural changes to the economy that accompanies aggressive monetary and fiscal tactics to pull Japan out of a lost decade, such as:

•  Public sector debt. Japan’s ratio of government debt to GDP is around 2.28 (and increasing), the highest out of all the industrialised nations by far. To put into perspective, it is almost double that of Greece and Italy. Further, the combined costs of interest on debt and welfare are equal to total government tax revenue. Reducing its public debt can spark some consumer and business confidence. Raising tax is not a good option but Abe believes that economic growth as a result of 'Abenomics' can make public debt appear more manageable. Impression management is no good - it is the doing that counts. 

• Demographics. Japan's working age population has shrunk every year since 1995. Because working age people are the biggest spenders, an ageing population has inevitably reduced overall demand in the economy. A vicious but not virtuous cycle appears - the lower retail sales lead to businesses engaging in cost cutting (common in  Japanese firms) which lead to lower wages and lower prices. Japan can begin by boosting the work force such as creating incentives for more women to re-enter work after employment, encouraging more marriage and couples to have more children or relaxing its immigration policy; immigrants can also change expectations of growth and inflation.

• Deflation mindset. As well as the above, Abe has the challenge of convincing inflation expectations beyond financial markets and into households and firms; many agree that there is a deflation mindset in Japanese households and businesses who all hoard cash and other assets rather than spend.

Japan may not have a comeback like Sinatra in this decade, nor perhaps the next. But there is a sense of optimism about Abenomics, and this, coupled with some fundamental structural changes, Japan can steer itself back on to the road to growth. This needs political will. In the mean time however, Japan is still trapped in a lost decade. 

JH