2047 Moves Closer

When Britain and China agreed on the Handover of Hong Kong in 1997, with the understanding that “One Country Two Systems” would allow Hong Kong to preserve its traditional freedoms, Deng Xiaoping said that by 2047, China and Hong Kong would be indistinguishable, and the merger would be completed (as well as a 50 years extension of all property leases).

Recent events in the “Special Administrative Region” have moved that date closer. Following the violent attacks on the New China News Agency offices, and several mainland China banks, with petrol bombs, rocks and other weapons. China has quietly decided to take a stronger line in enforcing “Patriotic Education” in Hong Kong schools, and press freedoms are being slowly curtailed. For the time being, the British legal system, and the Final Court of Appeal survive – a fundamental assurance of fair play (and no corruption) to the business community. But the subtle pressure is growing on, for instance, the Chief Executive of Cathay Pacific, who was forced to resign after expressing support for some of his employees who joined the protests. Money talks: and the ability of an airline, or a bank, or any foreign company, to operate freely in China, is always subject to politics.

For anyone, like the author, who lived in Hong Kong in the Golden era of 1982-1997, these are sad and depressing developments which do not presage such a happy future. When I arrived in Hong Kong in March 1982, I was astonished by the laissez-faire dynamism and energy of the place – a “barren rock” in the South China Sea with no natural resources, a refugee population of 6 million Cantonese (98%), Filipinos, and expats from Europe, Japan, America, Australia – from almost everywhere.

There was a flat income tax of 15% for everyone – so if you worked hard, you kept 85% of your salary and bonus – what a contrast to Britain or European welfare states! Even if property seemed pricey (it is now 3 or 4 times more so) everyone was there “temporarily”. It was fairly said that it was the only place in the world when you could have a good business idea in the morning, incorporate by lunch time, and be making a profit by the end of the day!

The legendary British Financial Secretary of the 1960s, Sir John Cowperthwaite, was so convinced of “Laissez Faire” that he would not allow his civil servants to collect economic statistics in case they were tempted to intervene – The Chinese Sage Mencius called it “Wu Wei” or “Do Nothing”. Margaret Thatcher used to repeat the old Chinese adage that the best way to govern a Kingdom was like cooking a small fish (ie. don’t meddle).

Hong Kong in its heyday was a marvelous practical demonstration of Libertarianism applied to daily life and business: minimal government; no welfare; just guaranteed law and order. But sadly in the past 5 months that seems to have broken down. The trust between the people and the local government and the police force, is inseparably fractured, 2047 is rapidly drawing nearer.

Meanwhile in China, where the use of facial recognition has been perfected, they are now adding “emotional recognition” which sounds like science fiction but may enable police and authorities to anticipate crimes or violent acts.

In any case, the “animal spirits” of investors in Hong Kong and China have already revived. Hong Kong share prices have jumped 5% from the bottom. China A shares have outperformed (+32%) the S&P500 (+25%) in 2019.

China is not going to be held back, though its economy will certainly slow in the next 3/4 years. Its national effort to catch up in technology, AI, renewable energy, batteries, high speed trains, medicine and biotechnology, 5G communications, blockchain financial technology, via its domestic consumer brands as well as domestic oil and gas production – none of these trends will reverse.

The Hong Kong District Council elections, on November 24, had a 71% turnout and resulted in “pro-democracy” candidates winning 80% of the seats. Although this has little real political consequence, it sends an important message to Beijing. Also, recent demonstrations have been larger in size, and mainly peaceful. There is some hope of calm and dialogue in the next few months, although HK’s economy has suffered from a 43% fall in visitors, especially from Mainland China, and a 24% decline in retails sales.

The Indian economy presents a conundrum, having slowed to 4.5% but, nevertheless, showing the promise of recovery in 2020 as the banking system and property market are cleaned up. Structural reforms, such as GST and demonetization, have slowed down capital formation (insert chart) and economic growth. The business community is having to make a real adjustment to more transparent lending and reporting and more efficient tax collection: all good developments in the longer term. The Modi government has also announced the privatization or listing of 33 public sector companies, including BPCL.

The Bombay stock market has held up well, although India’s Business Today magazine highlights that only 9 stocks, including HDFC, Reliance, ICICI Bank, HDFC Bank (among our largest holdings) have attributed 93% of the market gain of the past 2 months: quality companies, in terms of balance sheets, corporate governance, and earnings growth. Much of the US$13.2 Bn. invested in India by international investors has come in the form of ETFs, although Indian investors also added US$8 Bn.

We expect some “truce” in the US/China trade dispute by December 15 (the due date of the tariffs), which will be a powerful positive signal from US and Asian markets before year-end. Also Boris Johnson’s victory in the UK election will speed up Brexit, and remove uncertainty for international companies. Free trade, rather than protectionism, may be the trend in 2020, further boosting investors’ confidence.

We wish all our customers and readers a very healthy and happy Christmas and all best wishes for the New Year.

Robert Lloyd George
16 December 2019
Hong Kong

The Victory of Light

Reflecting on the situation in Asia at the beginning of November, we can look forward to the winter solstice, when the time of darkness is past, and the shortest day passes into greater sunlight. In the political sphere, we can see the return of mutual understanding, after estrangement and confrontation. This is becoming visible in the truce between the US and China on trade firstly; secondly, and hopefully in the final stage of the agonising Brexit process in Britain, with some hope of reconciliation with Europe in 2020. Thirdly, and lastly, from our Hong Kong office, the hope is that the worst is over after the last four or five months of political demonstrations and violence. Now, new leadership is needed to address the deep seated problem of inequality and the lack of opportunity for the younger generation (most of the Hong Kong demonstrators are teenagers). This is a global theme, although inequality is more extreme in Hong Kong where the median property price is 21x median income (compared to 8.8x in San Francisco, 12.6x in Vancouver and the US average of 3.9x.)

One political forecast we may anticipate is a swing to the left in 2020 perhaps in Europe as well as in the USA, with political leaders trying to address this inequality, through higher taxes and wealth redistribution. President Trump’s impeachment process may impact global markets in the first quarter, and the US dollar may weaken against Asian and global currencies. There is also a risk that inflation might reappear (notably in China where CPI has now reached 3%, owing to the doubling of pork prices this year). This would imply an end to the extraordinary period, through which we have passed, of negative real and actual bond yields, across the developed world, and probably will result in a recession by 2021.

Against this background, we are nevertheless confident that the Asia ex Japan region will outperform, especially Southeast Asia and India owing to their favourable demographics, political stability and underlying growth of consumers’ spending.

In India, for example, we have seen the beginning of an end of a severe monetary squeeze in the past six months, now resulting in an improving earnings picture and the bottoming out of economic growth, which has fallen from 8% in 2018, to about 5% in the last quarter of 2019. Our expectation is that Mr Modi’s second term, which will run till 2024, will result in more pro-business policies. We have seen the corporate tax rate cut, from 30% to 25%, and to 17% on new business, which makes India with its large low cost labour force, competitive with Hong Kong, Singapore and other low tax East Asian export economies. India’s government, under the BJP, has realised that power to harness the national energy towards wealth creation, depends on a smaller role for government, and a reduced tax burden.

Another positive development is the bottoming out of technology cycle, with a renewed emphasis in our investment strategy on Taiwan and South Korea. The introduction of 5G in China and other countries will engender a new cycle of demand for hardware, especially servers. One reflection of this cycle may be that Japanese machine tool orders may have bottomed out, after a very steep fall of 35% yoy, for the past two years. Another interesting development is that China’s government has recently embraced the Blockchain technology (perhaps to avoid the US dollar payment system) which has prompted a rally in blockchain related shares in China. We are monitoring the implications of this step carefully.

We believe that it is, medium term, rather bearish for bank share prices, and we have, for example, seen this week HSBC declaring disappointing profits, and a reduction in their manpower, and the sale of notable subsidiaries like France (over 90% of their profits are coming from Asia, notably Hong Kong and Southern China).

China’s oil production

China wants to be more independent in its trade and current account payments, and also in its energy needs (currently 70% imported from Middle East and Africa). We have selected a private Chinese fracking energy equipment provider which will benefit from this drive for energy independence.

The Hong Kong economy will almost certainly have had a recession in 2019, after two quarters of slowing growth. The severe impact of the political unrest and violent demonstrations on the tourism and retail industry, have affected hotels, restaurants and shops all over the territory. Property transactions have surprisingly held up, because of the recent decision by the Hong Kong government to allow 90% mortgages for properties up to HK$8 million (US$1 million). Nevertheless, we would be cautious about the outlook for Hong Kong property, given the high valuation level today. We are looking carefully for buying opportunities in Hong Kong shares, at this very depressed level, after such a difficult year. Our experience of the last 40 years of Hong Kong, suggests that the economy and the people of Hong Kong have great resilience, and buying opportunities occur during times of unrest and uncertainty like 1966, 1983, 1998 and 2003 during the SARS outbreak. At the same time, there has been undoubtedly some shift of wealth and corporate activity, from Hong Kong to Singapore, and we continue to look positively on the Singapore market as a centre for wealth management, banking, insurance and trade finance for Southeast Asia.

There are positive political developments in Indonesia, and large infrastructure projects. Our team of research analysts continues to scour the Southeast Asia markets for good stock picks, especially in the area of Renewable Energy. We recognise the importance of including climate change as a factor in future investment returns: although, truthfully, coal will likely represent 75% of electricity production in SE Asia until 2040 – as it has done in both China and India – we are researching opportunities to invest in hydro, solar, and wind power: and in the development of electric vehicles in Asia.

In general, we have become more cautious about Asian Frontier markets, and have now excluded Pakistan, Bangladesh and Sri Lanka from our Indian Ocean Fund because of the extreme lack of liquidity, and tradability of shares. The only Frontier market which we continue to favour, is Vietnam, which has adopted a positive policy towards foreign investors.

Robert Lloyd George
4 November 2019
Hong Kong

Looking Forward to 2020

As we enter the 4th quarter of 2019, after a volatile and difficult summer in world markets, we are conscious once again of the impact of politics on global equities which has become more and more evident. At the time of writing, President Trump is facing the inception of a possible impeachment process, which must weaken his political position approaching the November 2020 presidential elections. Our interpretation of this situation is that it increases the probability that Trump will reach an accommodation with China on the trade dispute in the next 3 to 6 months, because of his need to get reelected, and to boost the US economy, especially in the Midwest and other marginal states. China would be happy to commit to major increases in their imports of US soy beans, corn, wheat, natural gas, and other basic commodities, for which they have pressing need. This would be a “win-win” deal for Trump and for China, and would boost his reelection chances.

Having said that, we are conscious that our optimism in this regard has been misplaced over the last 2 years; and politics are always unpredictable. (The Brexit situation, in its final 3 weeks, is another example of the impossibility of predicting political outcomes, and constructing a rational investment thesis therefrom.)

The National Day in China on October 1st marked 70 years of communist rule since Mao Zedong took the podium in 1949 and said “China has stood up.” Xi Jinping echoed these words and said, “Nobody can keep the Chinese people down, or stop the growth of the Chinese economy.” These words are worth pondering, because of the very negative US press about China. Our Chinese team in Hong Kong is closely observing the trends in consumer spending in major Chinese cities, and they continue to be strong. There are a number of key companies, in food, pharmaceuticals, solar panels and other sectors, with earnings growth of 50% or above. We have recently expanded our research in the A-share market, and have found some outstanding investment opportunities. A trade deal would, of course, boost the whole market; but the key is the domestic sentiment in China, both for consumers and for investors. We hope to see this improving in 2020.

The Hong Kong situation is still very fraught and unpredictable, and has escalated into further violence in the past few days. Both tourism and retail spending have been hard hit, and even restaurants have felt the sharp downturn. The Hong Kong stock market, however, has been flat for this year, and has not been unduly affected. Indeed, they have successfully listed the Budweiser Asian subsidiary in Hong Kong in the last few days. Nevertheless, Xi Jinping reiterated his intention to abide by the “one country, two systems” principle, meaning hands off Hong Kong and allowing the local authorities and police to resolve the situation. We are hopeful that things will calm down in the autumn and winter period, and that some compromise will be achieved.

The table shows the relative position of Hong Kong, which has declined from over 25% of China’s GDP in 1990, to less than 3% today. Hong Kong’s salaries and rents are also much higher than neighbouring Shenzhen and Southern China.

Meanwhile, in India, we have had a very volatile market owing to the squeeze on banks and corporate borrowers which has made it very difficult for companies to obtain funding, despite declining interest rates. This financial tension was somewhat alleviated by Mr. Modi’s announcement of a corporate tax cut at the end of September, just before his visit to the USA, which boosted investor sentiment and will, we believe, result in a stronger economy and stronger earnings growth in 2020. We are currently estimating 15-20% growth in corporate profits on a forward PE multiple of 16 times. Infrastructure projects are going ahead at a rapid pace, and this will result in increased employment and consumer spending. We have refocused our Indian Ocean Fund on the core Indian blue chip companies, with good liquidity and strong fundamentals, and have reduced our exposure to Asian frontier markets such as Pakistan, Bangladesh, Sri Lanka and Mauritius. The only Asian frontier market which we continue to like is Vietnam, which is experiencing near 8% GDP growth, with a strong inflow of foreign direct investment and rapidly growing exports – for instance by Samsung Electronics, which accounts for 20% of Vietnam’s foreign trade.

Elsewhere in Southeast Asia, we have seen strong consumer spending and large infrastructure projects announced in the Philippines and in Indonesia, where we have increased our exposure to banks, consumer, and construction. The president, Joko Widodo, announced that Indonesia (a nation of 250 million), would be spending over US$30 billion on a new capital in Kalimantan, or southern Borneo (owing to the rising sea levels and flood problems in the capital, Jakarta). All of this will boost growth and investment opportunities in this large and important emerging economy.

In conclusion, we remain positive about the outlook for Asia, despite all the setbacks and difficulties which have arisen as a result of the trade war. The desire of Asian middle class consumers for a better life, with more consumer goods, more travel, better education and better housing, is not going to slow or stop. We have reached the second stage of Asian development after a 30-40 year rapid expansion in exports and living standards. For the next few decades, the emphasis will be on quality of life, more green energy, better water supplies, less air pollution and improved educational and cultural opportunities for the young people of Asia. We are looking for investment opportunities in these areas as we move forward into 2020.

Robert Lloyd George
9 October 2019
Hong Kong

After the Summer Doldrums

This summer has been a volatile period in the US market, as well as in the Chinese world, because of the uncertainty about the US/China Trade War and the continuing unrest in Hong Kong, for which we cannot forecast a clear resolution. At the time of writing, the G7 meeting has just concluded in Biarritz, and President Trump’s remarks on trade have, again, increased market volatility, with high frequency trading algorithms responding to key words in his tweets and press conference.

Nevertheless, the US economy continues to be strong. Corporate earnings have exceeded expectations, consumer confidence is high, retailers have reported very strong results and interest rates remain at all-time historic lows. Despite the briefly inverted earnings yield on treasury bonds, most market forecasters are not yet predicting a recession, perhaps not until 2021.

However, anxiety in Europe and Asia remains high, and the level of caution in the global markets means that we are not approaching bubble levels. Value stocks are trading at 44-year lows compared to growth stocks. The pound is at a 35-year low to the dollar. US share prices are at a 50-year high, relative to US GDP. Bond yields are at all-time lows, and there are now over US$16 trillion worth of bonds in Europe and Japan with negative interest rates.

The question of when the US recession begins, is critically important to the outcome of the November 2020 election. Until recently, the market had comfortably assumed that President Trump would be re-elected; but if that certainty begins to deteriorate, and a more leftwing Democratic candidate is selected, then the risk to the market will correspondingly increase. If US growth continues at around 2% and inflation and interest rates remain low, Trump is likely to be re-elected, but not if we are in a recession.

To a seasoned observer, it appears that there is, therefore, no alternative to high yield dividend paying stocks for the retired investors, or pensioners, or even large insurance company funds. The Norwegian Fund, for example, has over 70% in stocks now. Gold is making a comeback in the world financial system. China, Russia, and other emerging nations are buying gold for their central bank reserves at a rapid pace. Worldwide debt has reached almost US$250 trillion, or 320% of world GDP, up by 20% since 2012. This is the biggest danger to global markets and, if inflation should rebound in 2020/2021, then the impact on interest rates and markets would be very fast and very severe.

China’s economy has held up well in the face of the US trade tariffs; GDP is still above 6%. Latest retail sales numbers are growing at 7.6%, and on-line sales at 16.8%, although auto sales have fallen 4%. We have a two-track market in China, with the domestic consumer continuing to demonstrate robust confidence, and industrial output, exports and infrastructure all slowing down. The areas where we see high growth are cosmetics, skincare, sportswear, sports shoes, dairy products and yogurt, Moutai, or spirits and beer and wine, which are all growing almost 50% year-on-year.

Even the property market in China is holding up, showing 9% annual appreciation in sales, although new supply is diminishing and developers are holding back inventory. Mortgage rates are above 5%, against an inflation rate of 2.8%. With Alibaba announcing 40% year-on-year revenue growth, we cannot be completely negative about China’s outlook. It is, in any case, a very large continental economy, like the USA, where different regions and sectors have very different growth rates.

When we turn to Southeast Asia, we see the broad ASEAN economy growing around 5%, with higher growth in Vietnam and more sluggish growth in Singapore. Again, the consumer is the key in this region’s growth, with particularly strong earnings in Thailand and Vietnam. The Indonesian government has announced a US$33 billion project to build a new capitol in Kalimantan (Borneo) because of the growing flooding problem in Jakarta. We continue to favour the consumer and IT sectors in Vietnam, which, with a young population of 100 million, has a large inflow of foreign direct investment.

The renminbi has weakened to almost 7.2 to the dollar, and this has a regional impact with other currencies also depreciating, such as the Australian dollar and the Korean won, notably. The two strongest currencies in Asia are the Japanese yen and the Thai baht, and these may emerge as safe haven currencies for investors just as the Swiss franc and, perhaps, the Norwegian krone, are in Europe. There is no doubt that Asian demand for gold is also growing (and much of the demand for cryptocurrencies is also coming from the East).

The European outlook continues to be clouded by the unknown impact of Brexit, whether “no deal” or with a new agreement on the Irish back stop, by October 31st. We have barely two months to go, and the German economy, meanwhile, is already in recession with a pronounced slowdown across the whole Eurozone. Some of this is due to the slowdown in Chinese demand (German exports to China are down 7.5%), since China has become Germany’s leading trade partner. In addition, the fall in oil prices has curtailed some of the demand from the Middle East for capital and consumer goods. There is an outside risk, however, that we see a showdown with Iran approaching in September, and causing a spike in oil prices, which would negatively affect Europe and Asia. (The US is in the fortunate situation of having raised its oil production now to over 10 million barrels a day since fracking came in a few years ago, and is, therefore, much less dependent on imports than it used to be.)

The Indian economy is in a sharp slowdown, and the next two quarters of corporate earnings will disappoint. The banking sector is suffering from high levels of nonperforming loans and questionable accounting practices, by the major international auditors which have led to their being banned from major Indian banks. The Reserve Bank of India has become much more vigilant, and a crisis of confidence has resulted from the Modi government’s reform measures in goods and services tax, a new bankruptcy code, and new real estate regulations, which have choked off growth in the short-term. Banks are scared to lend, and corporates are being starved of cash. The slowdown in auto and real estate sales has led to unemployment, and severely hurt domestic consumption.

We expect a strong pickup early in 2020, when the forecast is still for earnings growth of 20% and nominal GDP of 10%; but these forecasts can be downgraded, and the monsoon season in India has been very uneven with severe flooding in two or three states in western India. One of the few bright spots is Reliance Industries, which is doing well in all three segments of their business: oil refining (with a big injection of capital from Saudi Arabia), retailing, and telecoms (both of these last divisions will be spun off in separate listings over the next two or three years). Despite the US downgrading India’s status as a trading partner, we continue to see big opportunities in the IT sector for Tata Consulting and Infosys.

At the end of August, the government announced a US$10 billion injection into state banks and other stimulus measures, including the withdrawal of the foreign portfolio investor tax and some incentives for the automobile sector.

Conclusion: The investment outlook has never been more difficult to forecast but with very low interest rates and a general atmosphere of investor caution and pessimism, the odds are that stock markets will surprise on the upside, particularly where dividend yields are high and sustainable. There is still plenty of excess savings and capital available, as we see from the bubble in private equity. Our worries are about what happens when the current inflated debt bubble meets a real slowdown or recession in 2020 or 2021; but our immediate focus is on corporate earnings, in the first half of 2020, and the political outlook, both in the USA as well as Europe. Writing from our Asian HQ in Hong Kong, we are hoping that the autumn will bring a calmer period to the city and an easing of tensions with China.

Robert Lloyd George
9 September 2019
Hong Kong

1997 and its Aftermath, Today

Writing in Hong Kong at the beginning of July, I am bound to comment on recent events in the city. The violent attack on the Legislative Council building last week has shocked many observers, and although the extradition treaty has been shelved, there is growing concern among my Hong Kong friends and business contacts about the future; whether in fact the “One Country Two Systems” model agreed between the Britain and China in 1997, will be maintained at least until the 50 year term is up, in 2047.

The fact that the Hong Kong’s GDP was 20% of China’s in 1997 and is now less than 3% (and in fact is smaller than Shenzhen) is a telling indication of how much less importance China might attach to Hong Kong today compared to 20 years ago. Nevertheless, the attractions of its international financial centre, British legal system and independent judiciary, free press, free movement of people, and goods are still important, as well as the low tax rate of 16.5%. The Hong Kong dollar/US dollar peg is as sound as ever; despite many brilliant hedge fund managers attacking it, it has stood the test of time since 1983, and we do not expect it to change.  Having said that, it is probable that some individuals, and businesses, will migrate to other centres such as Singapore.  We continue to believe that Hong Kong has some of the best run companies in the Asia Pacific region, and it remains a very valuable gateway into China for trade, property, banking and insurance.  Two of our most favoured companies, are AIA, based in Hong Kong, and Ping An (in China) both in the rapidly growing insurance sector.

Despite the probability that the Federal Reserve will cut rates rather than increase them in the second half of 2019, there is growing concern that we may be approaching the end of a very long economic expansion, and that we could have a recession in 2020. There are many signs of this economic slowdown in retail, in tourism, and in trade.  For example, we have seen the number of Chinese tourists fall off sharply to certain destinations such as Thailand, where Indian tourists are taking the slack and becoming a new growth sector.  Also Chinese capital outflows have sharply slowed and their purchases of Australian and Canadian properties have ground to a halt.

The uncertainty about the trade talks between President Trump and President Xi Jinping, continues to overhang the market and we can no longer make any confident predictions about the outcome. We have shifted our attention over the last year to Southeast Asia, notably to Vietnam and Indonesia, as well as Thailand and Singapore, which have been the major recipients of foreign direct investment and transfer of assembly plants, in electronics as well as textiles and shoes, away from Southern China into these new low cost destinations.

Despite a potential slowdown in China’s GDP growth to perhaps 5 or 5.5%, we still see domestic consumption and tourism growing at nearly 10%. In June, Chinese consumers’ purchases of domestic brands have outstripped foreign brands for the first time – one consequence of Trump’s trade war.  Luxury cars, cosmetics, and LVMH type purchases continue to do well despite a fall in the overall automobile sector.  We are now researching more deeply into the most successful consumer brands such as the hotpot chain, Haidilao.  Also, BiliBili and Weimob, are two of the fastest growing online apps which are very popular with the millennial generation (aged 15 to 24) in China (numbering some 300 million young consumers).

We expect the Reserve Bank of India will continue to cut rates after its 0.25% cut in June. The 10-Year India Government bond yield has also fallen below 7% as inflation has eased.  The Indian budget was announced on 5 July by the new Finance Minister, Mrs Nirmala Sitharaman, and although taxes on the wealthy have increased, there is more support for the rural poor and small business.  In the second half of this year, we expect the economy to pick up with the low oil price, stronger capital spending and lower interest rates.  It has been however a shock to see that the US terminated India’s trade classification as a developing nation under the GSP (Generalised System of Preferences) trade program. This does not have a broad impact because of India’s relatively limited exports, mainly generic drugs and software programs.  We do not believe therefore that the Indian market will suffer, but it is a negative development.  We have hitherto seen India as a protected market from the US-China trade tensions.

South East Asia continues to grow at an average of 5%, led by Vietnam and Indonesia, both having more progressive pro-business governments, focused on improving infrastructure, as well as middle class consumers. The growing impact of foreign direct investment from China, as well as the rest of the world, is favouring such companies as Siam Cement, Ayala Land, Hoa Phat (factory construction in Vietnam) and Ace Hardware in Indonesia. Over the next decade, our belief is that ASEAN could be the most rewarding (and hitherto underrated) region for investors, so we are progressively increasing our SE Asia weightings in our regional funds.  This includes Singapore, where we are making a program of research visits this week, in technology, real estate, finance and telecom.



Robert Lloyd George
10 July 2019
Hong Kong

The Elephant Can Catch Up with the Dragon

For many years now, we have been following China and India as the 2 leading emerging markets in Asia and the world, as well as South East Asia. China has often gone rapidly ahead, in economic growth; but in terms of investment returns, India has made up, over a 10-year period, a better overall performance to the patient investor.

In our comments below, we highlight recent events in China – the Trade War, the crisis in the pork industry, as well as our detailed comment on the recent elections in India.


It is difficult for those of us who have followed China closely for over 30 years, since Deng Xiaoping first opened the country to market forces and foreign trade (with the result that income per capita has multiplied 30 times since 1980), to recognize the new global situation today.

The US and China are in an economic “Cold War”: a temporary trade truce will not change this reality, nor will it completely alter China’s rapid ascent to prosperity.  Domestic consumption will keep growing Chinese brands like Anta, Midea, Haidilao, Geely, Alipay, and Wechat.  There is an investment opportunity here for contrarians to buy China’s leading brands.

At the same time, there is a growing, and largely unreported, crisis in China’s rural hinterland with a pig population of 440 million. China accounts for over 45% of the world’s pork production in 2018; and the sudden advent of African swine fever is devastating the 36 million small farms in rural counties, employing about 40 million people.  Between 40% and 50% of these pigs will have to be slaughtered (some of the virus is due to sloppy farming practices of feeding waste to the pigs), and with an estimated 100% rise in meat prices in the 2H19, large increases in imports of meat and grain from the US, Brazil, and other nations, and rising inflation for Chinese consumers.  (Chinese people consume nearly 60 million tons of pork annually, almost 3 times more than chicken, and 10 times more than beef or lamb.)

The impact of the Trade War is more difficult to evaluate; but it has certainly depressed the “animal spirits” of Chinese businessmen and investors. Hence, our constant anticipation of a strong market rally in July if a truce is reached between Donald Trump and Xi Jinping at the G-20 Summit.

It is worth also considering the other Asian nations that have large trade surpluses with the USA. The new 25% tariff will cost each US household about US$830 a year.  The real winners are China’s competitors in South Korea, Taiwan, and – more importantly – South East Asia (Vietnam, Thailand, Malaysia, Indonesia, Singapore).

We continue to believe that Vietnam and Indonesia will be the immediate beneficiaries of a rapid shift in manufacturing from Southern China to these cheaper locations. In the longer run – more than 5 years – both India and Bangladesh can become significant manufacturing exporters given their large cheap labour force. Against this, we have to estimate the impact of automation, 3D printing, etc.

Moreover, China’s working population peaked at 1 billion in 2013; and by 2035, it will have 80 million fewer working-age citizens, resulting in lower economic growth and lower savings rates. Coupled with a rapidly shrinking surplus on current account (and trade account), this could result in a weaker Renminbi.


The election result in India has exceeded all expectations, with Mr. Modi’s BJP increasing his majority from 282 to 303 seats out of 543.   This will enable Mr. Modi to complete and accelerate his economic reform programme in the next 5 years to 2024, with positive implications for infrastructure, consumption (tax cuts coming), and the Indian share market, plus the Rupee (lower oil prices, less uncertainty) and lower interest rates, as inflation subsides.

We are very bullish on India, the best emerging market in the world, with the highest economic growth and strongest corporate profits, and (thanks to its democratic system) a degree of political stability and predictability. Mr. Modi’s personal probity is a key factor in his electoral success, and in our ongoing optimism about India’s economic and political directions.

While the US-China trade situation continues to be unpredictable and acrimonious with negative effects on the technology sector, India, on the other hand, looks the most promising market over the next 5 years. To quote Mr. Modi today, “India wins yet again. Together we grow, together we prosper, together we will build a strong and inclusive India.”  During the next 5-year term, to May 2024, we expect that India will see less disruptions to growth, such as demonetization and GST, and more fulfillment of India’s growth potential, with the same major policy agenda in place.  Meaning that:

  • Tightening GST compliance by introducing invoice matching, will boost GST collections by 20% in the next 2 years
  • Farmers’ incomes could double
  • Affordable housing and a broader property market, by allowing banks to fund land acquisitions and giving tax incentives for rental income
  • Keeping inflation low and reducing the high cost of capital for Indian developers and corporates. We expect a 75 bp policy rate cut at a minimum, and perhaps more than 1%
  • Infrastructure will be the major push for the New Delhi administration, focusing on roads, railways, airports, and subway systems
  • Consolidation of public sector banks, with some resolution of the nonbank financial (NBFC) situation
  • Mr. Modi started with financial inclusion (300 million new bank accounts since 2014). Now he will continue with medical insurance for all
  • A focus on tourism and job creation in this sector
  • Faster dispute resolution by improving the legal system. This has been India’s Achilles heel for a long time, and would be extremely beneficial, in our experience, for foreign investors
  • Finally, “Make in India” will continue to be a core policy, and will include defense equipment

We expect India to continue to outperform Asia ex-Japan because it is selling at 18 times PE, but has higher (15% – 20%) earnings growth, compared to 6% in the rest of Asia; and foreign funds are still very underweight India because of the political uncertainty in the last few months. We expect that that the current goods and service tax, at 28%, could be cut to 18% for sectors like cement in order to boost affordable housing or 2-wheeler.  Our local investors in India are greatly encouraged by Mr. Modi’s win and the stable political outlook which results; and we expect the underperforming midcap sector to recover strongly in the second half.


On balance, we counsel our clients and investors to maintain an equally balanced portfolio between China, India, and South East Asia. With the possibility of a US market setback, and some currency volatility, we have been focusing, especially, on low risk and low volatility selections, such as Singapore REITS and other high yield, but growth, businesses in South East Asia.



Robert Lloyd George
1 June 2019
Hong Kong


Asia Today, and the Long Term

As we get into the summer months, there are some headwinds, in the short-term, to our positive view of Asian markets. Most notably, the oil price has risen to US$75 a barrel which will weigh on the current account and trade balances of China, India, Japan, and the major Asian economies. Also, we do not yet have a definitive trade agreement between the US and China, and the uncertainty has been exacerbated by the US pressure to remove waivers from the Iran oil sanctions (both China and India import a lot of oil from Iran). World trade growth has slowed over the last 12 months from 4.5% to 3%, and this is particularly affecting exporters in Europe.

Nevertheless, the first quarter has seen stronger-than-expected earnings, and economic growth in the Asia Pacific region has held up well. China is still the key driver of the global cycle. Although the Chinese economy accounts for around 19% of world output, the contribution of Chinese economic growth is now approximately 30%, according to the IMF. Last year, moves by the Chinese government to deleverage slowed down growth, but since January, we have seen a move to introduce new stimulus through tax cuts as well as infrastructure spending. This makes us a good deal more confident about the outlook for China and the region, and the 32% jump in the Chinese index in the first 4 months indicates a return of domestic investor confidence. In our view, this is the beginning of a longer-term recovery and opening up of the Chinese A Share market, which will see a rise of China’s market capitalization from 50% of GDP to something more like the 150% we see in the USA and Europe.

As we have observed before, there are parallels with Japan in the late 1980s after the Plaza Accord with the US, which led to strong capital inflows with a strong yen and high savings rate. In this regard, we have analyzed carefully the debt position in China, and we remain confident that, although corporate debt has risen and recently US dollar denominated borrowing has grown, the high savings rate (over 50% of GDP) and foreign exchange reserves of US$3 trillion are more than sufficient to offset these concerns. Having recently started reading The Hundred Year Marathon, about China’s strategy to replace the US as the global super power, I remain convinced that it will be very difficult to keep China down, particularly with regard to technology, where they are still moving ahead rapidly with artificial intelligence, robotics, 5G, telecom and, perhaps most interestingly, biotechnology and other innovations in the medical sphere. We expect that, with the concerted commitment of the Xi Jinping national team, growth will be maintained at 6%, and we would not be concerned if it fell to 5%.

Meanwhile, India is holding the world’s largest democratic election, with 900 million voters over a 6-week period. There is some nervousness about whether Mr. Modi and his BJP party can maintain an absolute majority. Our expectation is that his economic reform program will be maintained even if he returns to power with the support of a coalition. Democratic systems are much harder to handicap for investors because of unexpected outcomes like Brexit, Mr. Trump’s 2016 surprise election, or even recently, the Ukraine electing a comedian as their president.

India moves slowly, but steadily, towards greater prosperity and the inclusion of hundreds of millions of their citizens in the new digital economy. The expectation is that middle class consumption will rise from US$1.3 trillion today to about US$3 trillion within the next decade. This is the investment opportunity in India – in the field of consumer brands, travel and tourism, housing and savings products. India now has a US$2 trillion market cap, and the domestic fund management industry, focused on Bombay, is growing at a rapid pace. India’s economy is growing at nearly 8%, and it would not surprise us if wealth creation in India surpasses that of China over the next 50 years, given that it is a much freer system.

Meanwhile in Indonesia, we have had a decisive win by President Joko Widodo with over 65% of the votes, in another large democracy of 260 million. This will also remove uncertainty and bring more foreign direct investment to Java and the Indonesian islands. We see both the banking industry and the consumer sector as being the key drivers of growth in Indonesia, although infrastructure will be a very important area as well. Singapore, at the center of this dynamic region, has very good prospects to attract more capital, with almost $1 trillion of high net worth individual wealth domiciled in Singapore, over 80% from international investors, notably Indonesia, Malaysia and Brunei. We favour the banking, real estate and oil service sectors in Singapore, and we continue to screen the high-yield and REIT sectors for interesting long-term investment opportunities in Singapore dollars.

Overall, there is a great deal more stability and predictability about the long-term picture in Asia than in Europe or the USA today. We do not expect any sudden or dramatic political changes, and the region is, in our view, in a very long-term cycle of catching up to its previous position, before 1800, in the world economy.

As I outlined in the East-West Pendulum, from AD1 to 1820, the 2 largest economies in the world were always China and India. Although, historically, this growth has been centered on China and India, there have also been very wealthy and successful kingdoms in Indochina and the East Indies, which we see as being precursors of today’s dynamic Asian economies.

In addition to the quantitative factors, we should highlight the fundamental and qualitative changes that are taking place in the emerging markets, especially in Asia. In contrast to the backlash against capitalism in the US and Europe, there is a move in Asia and the emerging markets, towards much better corporate governance and a healthy and positive attitude to capitalism and entrepreneurship among the millennial generation, which dominates these countries.

Chinese ‘millennials’ alone (350 million) outnumber the entire US population. The other millennial countries, with young populations, are India, Indonesia, Pakistan, Bangladesh, Philippines, and Vietnam.  In these nations, there is also a rapid improvement in financial technology – for instance, China’s mobile payments market is now 50 times bigger than America’s.  Alibaba and Tencent handle 20 times more payments in 1 month than PayPal or other US companies.  This transformation has been led by the millennial generation.

With 60% of the world’s population in Asia, there is no doubt that the growth of middle class spending (defined as having daily income and spending up to US$100 per capita), in that region, is a key indicator for all multinational companies. With growth at 5% or more, China, India, and Indonesia double their per capita income every 14 years; and, within the next 30 years, this large human population in the east will quadruple its annual spending.  The “late mover advantage” will mean that solar power, mobile phones, and digital on-line business will rapidly transform the economies of Asia (and, indeed, Africa).  It is surprising, therefore, that the emerging markets are selling at a 25% discount to the S&P 500 with this compelling growth story, and improvement of corporate governance, and treatment of shareholders being a major positive change.

Robert Lloyd George
3 May 2019
Hong Kong

The Real Costs of Populism

Writing in the first week of April, we are still not certain about the outcome of Brexit, or of the US-China trade deal. Our assumption is that Britain will, indeed, go out of the European Union, (perhaps with a long delay) but, hopefully, with an agreement rather than without, but that there will be economic costs and damages to the nation.  In fact, there already are such costs apparent, in the closure of 3 large automobile plants, the departure of many high-level city jobs to other European centers, and the general economic malaise and lack of decision-making, which has led to a fall both in Sterling and in the value of London property.  All of this could become very much worse if Jeremy Corbyn becomes Prime Minister in the next year.

Likewise with the US-China trade deal, much of the damage has already been done, even if there is, at the end of April, a triumphant announcement by President Trump, that he has now agreed terms with China, and there will not be any further tariffs on trade, that the Chinese market for many sectors, such as finance and autos, will be opened up, and that China will attempt to redress its large trade surplus by making major purchases of US energy, food, and other products. The costs of populism, in both cases, are now coming home to roost; and the ordinary voter and citizen can begin to appreciate what folly it is to upset the benefits of globalization and free trade, which have given us all such prosperity over the past 30 years.

Nowhere is this more true than in Asia, where there is much less opposition to globalization because nearly all voters and citizens have benefited from the spread of trade and hundreds of millions have been raised out of poverty in China, in Indonesia, and in India. In both India and Indonesia, elections are being held in the next two months which will almost certainly result in the re-election of the existing governments, precisely because they have generally delivered the economic goods, as well as attempted to clean up corruption and enable more foreign investment and trade.

Although China does not have elections as such, the Beijing government is both sensitive and responsive to popular demands. It is therefore determined to maintain 6% GDP growth, and to continue to boost infrastructure development, providing US$650 billion of new credit to the financial system in January.  This has resulted in a 30% jump in the Shanghai Index in the first three months of the year.  (Our Bamboo Asia strategy is 50% weighted in China and Hong Kong, and has outperformed strongly year-to-date.)

The Chinese Yuan has remained steady, if not strong, against the US dollar. In fact, we liken the US-China trade deal today to the US-Japan Plaza Accord of 1985, which led to a revaluation of the Japanese Yen, and to a 5-year boom in Japanese stocks and property.  With over US$3 trillion of reserves trapped in China, and private savings in China exceeding that figure by more than 2 times (50% of GDP), we expect that China A-shares will continue to surprise global investors with strong earnings, improving corporate governance, and a catch-up of market cap to GDP from its current level of 50%, to 100% within 2 years.  In sum, we expect China will be one of the best performing markets in the world between now and the end of 2020.

Asia’s Switzerland

We are interested in Southeast Asia because we see the consequence of the US-China trade war as being of great benefit to Vietnam, Indonesia, Philippines, Thailand, and, eventually, Singapore. We highlight Singapore because it is at the center of this increasingly wealthy ASEAN region, and has the unique characteristic of a strong and clean government and currency; and it has become, in effect, the banking centre of Southeast Asia, or its “Switzerland.”

In the chart below, we show the comparison between banking deposits in Switzerland and Singapore, and their growth rate. Singapore has always benefited from the inflow of capital flight from Indonesia and Malaysia and, further afield, from China and India.  It offers permanent residency to wealthy Indians and Chinese, and attracts their families by offering a clean, healthy lifestyle, low taxes, and a good legal system.  Now that Hong Kong is becoming increasingly absorbed into, and dominated by, China, Singapore does indeed have a unique raison d’être in attracting capital as well as talent from all over Asia.

We have had elections in Thailand, which have produced a continuation of the status quo, namely military (or semi-military) government, despite the protestations of Mr. Thaksin. This will be followed in May by the coronation of the new king.  Likewise in Japan, we will enter a new era, “Reiwa,” from the beginning of April with the accession of the new emperor.  We expect this will be symbolized by the Tokyo Olympics of Summer 2020 when Japan will also, (as it did in 1964), present itself as a new, modern and open-minded nation which will counter the demographic effects of aging and diminishing population by being much more open to immigration, especially from China, Korea, and Southeast Asia.  Japan can, in fact, present itself as a democratic alternative to China’s totalitarian system.  Japan already offers capital investment in South Asia and Southeast Asia to counter the enormous gravitational pull of the “One Belt One Road” program of China, which is now encountering some resistance in Pakistan, Sri Lanka, Malaysia, and even Thailand.  Nevertheless, Xi Jinping recently made a successful visit to Rome where Italy has now signed up as another participant in the “One Belt One Road” scheme.  It is clear that the US and China (like the US and the Soviet Union in past decades) will compete and come into conflict over the allegiance of many countries, not only in Asia but now increasingly within Europe.  The case of the Huawei 5G is already a cause célèbre in which Germany and Britain, for example, have to choose between security risks and economic benefits.

Our investment conclusion remains clear-sighted, long-term, and steady in its analysis that China, India and Southeast Asia, in an appropriately weighted portfolio (around 30% in each region) will provide investors with the best long-term total returns, including dividend income. This is one reason why we have emphasized Singapore and Southeast Asia, because of the stability and high yields on offer.  We remain positive on the outlook for Asia this year, especially in our call for the re-election of Mr. Modi to a further 5-year term of office in May, which will boost returns from Indian shares and strengthen the Rupee.  Our equally positive assumption, that free trade will prevail over nationalism and ideology, is another reason why we think Asia, with its high economic growth and productivity, will prove to be a rewarding region for investors over the next 5 years.



Robert Lloyd George
8 April 2019
Hong Kong


The ASEAN Opportunity

Asian markets have started the year in a bullish mood with nearly all markets up 5 to 10%, in particular China, which rose 12% in the first 6 weeks. We look for further gains this year especially in the neglected and under researched A Share market, in which we are pioneers.  The recent discussions between US and China trade negotiators have also focused on the Renminbi remaining stable against the US Dollar (currently 6.70).

China is undergoing an important transition from being the low-cost manufacturer of the world to an economy focused more on serving domestic consumer demand, and doing more business with its Asian neighbors – hence, our renewed emphasis on ASEAN, with a target weighting of over 30% in Singapore, Malaysia, Thailand, Indonesia, Philippines, Vietnam.

In January, we saw new credit issued to Chinese borrowers surge 51% year-on-year to 4.6 trillion Renminbi, or US$687 billion. Despite the 6% fall in passenger auto sales in the past year, and an 8% decline in new residential completions, we expect easing financial conditions in China to power a cyclical uplift in the first 6 months, with key beneficiaries being energy, utilities, and infrastructure.

We remain concerned in the medium term about the property and construction sector in China with an estimated 50 million empty apartments. Meanwhile, demographics is having an impact (as it has in Japan in the past 30 years) with China’s working population between 15 and 64 declining at an annual compound rate of 0.3% from a peak of 996 million people in 2014, falling by about 30 million over a decade.  Property in China has an outsized impact on the economy, both in terms of construction and bank lending.  (According to some estimates, the value of real estate held by private households is nearly 5 times GDP, compared to a US peak of 2 times GDP in 2005.)  The current meeting in Beijing of the Communist Party leaders, has confirmed a GDP slowdown to 6%, but has announced tax cuts, and other stimulus measures, including support for the A Share market.

One of the important developments in China this year is the rollout of 5G by the major telecom groups, such as China Mobile and China Unicom. We also see opportunities in the China Tower Corporation Limited, which has 1.9 million operating towers across China.

Has there really been a Trade War? Like Brexit, the mere threat of such a spectre has chilled capital spending and expansion plans.  Companies prepare for the worst.   Donald Trump, while on the one hand reducing taxes and regulations on domestic US businesses, has ramped up his “America First” campaign, and threatened not only China, but also Europe and even Canada and Mexico, with tariffs.  The reality is that the US wants to do more business, but on their terms – and the real threat was China’s “Made in China 2025” target of dominating AI, robotics, 5G, electric vehicles, and other key strategic industries of the future (many defense related).  However, ambition is one thing.  The reality is that China today imports US$250 billion worth of semiconductors (more than oil imports) and is not yet ready to compete in so many areas.  It will, nevertheless, be hard for the US to keep China down, and it is right to insist on intellectual property protection.  This is now fully accepted and supported by President Xi Jinping’s administration.

The only exception to the upward trend has been India, which is down marginally year-to-date on investors’ apprehension about the May elections, and rising tensions with Pakistan. Although the stock market has been weak (especially, the midcap stocks, which are down 16% in the last year), the actual corporate results remain strong with revenue growth of 22.7% in the past quarter.  This indicates the strong GDP and consumer growth across India.  However, the margins have been pressured by a volatile oil price and Rupee, as well as high real interest rates.  Earnings, measured by EBITDA, grew 16% YoY (excluding oil marketing companies).  The exceptions to this slow profit growth have been IT and private banks, as well as retail, all of which we are overweight.  The energy, telecom, and auto sectors have been the worst performers.

Overall, we remain sanguine about the outlook for Indian equities over the medium term.

Meanwhile in Southeast Asia, we remain focused on the consumer opportunities in Indonesia and the Philippines, represented by fast food outlets, hardware stores, telecom and banking. The value proposition in Southeast Asia is also mirrored in the relatively high dividend yields of 4 to 5% on some major companies, especially in Singapore, Malaysia, and Thailand.  With the increased flow of Chinese trade and investment into this area, we expect strong sales and earnings reports to come through in the next 2 years.

Indonesia holds a general election in April; and, unlike in India, there is no question that President Jokowi will be returned with a good majority to extend his reform and infrastructure plans, which are positive for Indonesia’s economy and market. Thailand also holds an election in late March, but we do not see any significant change for the economy.

The general impression of South East Asia is of a high degree of stability with growth rates of 5 to 7%. Consumers are, just as in China, conservative with high savings rates of over 30%, but per capita income in Singapore is US$53,000 – higher than Japan.  In Vietnam, Philippines, and Indonesia (with over 450 million people in these 3 large nations), the incomes average about US$3,000, but the middle class is now 15 to 20%, comprising a group of 70-90 million consumers, with US$10,000 to US$15,000.  Education is rapidly improving with large numbers of students at universities and people traveling overseas.  Many of the trends in China – infrastructure, tourism, healthcare, education, housing, e-commerce, and apps – are quickly mirrored (within less than 5 years) in ASEAN.  Alibaba has engineered a rapid expansion through Lazada in Singapore, Tokopedia in Indonesia, Bigbasket in India and many more in the region.

In conclusion, we believe a balanced portfolio of China, India and Southeast Asia will produce the best returns in the next 5 years with less volatility, and exposure to the best companies in the fastest growing regions in the world.

Robert Lloyd George
6 March 2019
Hong Kong

A Prosperous Year of the Pig!

History is a useful Guide for Investors, especially when the crowd is issuing warnings of doom and collapse. Throughout my 37 years in Asia, we have had periodic panics and stock market collapses, such as 1987, 1998, 2000, and the financial crisis of 2008/9, since which we have enjoyed a 10-year bull market.

Political crises, such as 1983/4 Hong Kong, 1989 Tiananmen Square, 9/11, and the Iraq War 2003, have also deeply impacted markets. One lesson we have learned is that life gradually returns to normal, daily business goes on, and it is well worth being a long-term contrarian investor.

My long-term faith in Asia, and in her hard working people, has never faltered.

Through my work with the Lloyd George Asia Foundation, I have also witnessed the thirst for education and self-improvement in some of the poorest neighborhoods of Calcutta, Manila, Bangkok, and the remote Karen Hilltribes Trust of Northern Thailand, which I recently visited. The first thing these children need is a reliable water supply – then dormitories; but the strong desire for literacy, for knowledge, for learning languages, and skills such as nursing and engineering is present everywhere.

In our investment strategy, we have increasingly focused on finding driven and committed entrepreneurs and founders of new businesses, whose energy and vision benefits all their shareholders. I have had the great good fortune of meeting Li Ka Shing of Cheung Kong, Robert Kwok of Shangri-La, TK Wen of Selangor Properties, Narayana Murthy of Infosys in Bangalore, among many others.  More recently we have visited young entrepreneurs in Vietnam, and other new frontier markets.  The ethical principles, and high standards of corporate governance, which have governed large companies such as Tencent since its founding, have led to them being ‘multi-baggers’ for investors over the last 20 years.

China today, as the world’s second largest economy, represents 15.2% of global output, but is only 3.2% of the MSCI All World Index of markets. The same figures for INDIA are 3% of the global economy and 1% of MSCI.

More importantly, by 2030, it is likely that China and India in 2040 may become the world’s two largest economies as their vast populations rapidly increase their incomes and standards of living. Surely for investors, it is appropriate to look forward rather than backwards.  Although, if we look back to 1800, India and China (in that order) were the two richest nations.  The wheel of history turns around, slowly but inexorably.

There is a parallel between Japan 1960-1990, and China 1990-2020. The earlier two decades, in each case, were periods of rapid economic growth, but poor stock market performance that were succeeded by the last decade of slower economic growth, and a stronger share market, as the accumulated capital from industry and exports was redirected into property and shares.  China is a special case, being a centrally directed economy, and the Shanghai market is a ‘policy-driven’ market.  In 2019 we see the opening up of China’s financial sector and inclusion of more A Shares in MSCI indices, which will lead to government support measures for the market.

In India, we definitely see scope for an interest rate cut of at least 50 basis points in February, given that inflation has fallen to almost 2%, and the RBI rate is 6.5%. Much will depend on the evolution of the oil price (we expect US$60 a barrel) and the Rupee holding steady at 70/71 to the Dollar.

This week’s Indian budget has been focused, for political reasons, on support for farmers and the rural poor, with talk of a Universal Basic Income. Further stimulus can be expected before the May election, which should favour automobiles, property, and other rate sensitive sectors (private sector banks/mortgage lending). Bank credit growth has accelerated to nearly 15%, though industrial production has slowed.  In India, as elsewhere in Asia, the real story is the consumer.

It is also noticeable that domestic Indian institutions have increased capital flows into the Bombay market while foreign portfolio investors are cautious. The ‘Nifty 50’ is on 16x PE (below its historic average) with earnings expected to 18% to 20% in the next year.  Though small caps have underperformed in the past 12 months, we anticipate a recovery after the general election.  Long term, India remains our favourite destination to allocate patient capital.

There are many unforeseen consequences to the Trade War (also true for Brexit). One is the geography of technology assembly plants.  Apple has intensified a search for ways to diversify its supply chain, and that hunt has now honed in on India and Vietnam.  To quote one manufacturer:  “American workers won’t work around the clock.  China is not just cheap, it’s a place where, because it’s an authoritarian government, you can marshal 100,000 people to work all night for you (at US$2 an hour).”

This year has elections in India, Indonesia, the EU, and several other key countries. In addition, the coronation of the New King of Thailand on May 4th closely follows a return to “democracy” there in March 24 elections.  On April 1st, the new Emperor of Japan will designate a name for the “Gengo,” or New Era, symbolizing his reign.  Japan will host the 2020 Olympics and become more open to immigration and foreign investment and influence.  The yen could be one of the stronger currencies of 2019/2020.



Robert Lloyd George
8 February 2019
Hong Kong