Why metaphors? Maybe that’s not the best word, but what I mean is that American investors, even professionals, tend to place huge weight on individual company analysis and stock selection. My experience with foreign PMs is just the opposite–all conceptual macroeconomic and political framework, coupled with inability to decipher individual company financial statements.
But why not do both?
These are the two high-level stories that I think have relevance for US portfolio construction today.
- Japan in the 1950s vs. in the 1980s
World War II was economically devastating for Japan, with much of its industrial base and a large part of its workforce destroyed. Its recovery strategy was straightforward:
–keep the currency undervalued; rebuild domestic infrastructure with a focus on export-oriented manufacturing,
–keep strict control on wages and on the availability of foreign-sourced consumer goods, and
–constantly remind current workers that their economic suffering would make the country a better place for their children and grandchildren.
The result was a generation of economic privation, but the creation of a dominant export-oriented manufacturing powerhouse–and a blueprint for every emerging economy since then. By 1985, after a generation of sacrifice, Japan was so prosperous and economically powerful that the rest of the world forced a sharp revaluation of the yen, and the country entered the “high yen” era.
what’s key here
From a stock market point of view, the 1970s and early 1980s stars were export-oriented industrials, like Toyota or Sony. Their main attraction, other than the quality of their products, was that their costs were in yen and their revenues were in strong currencies like the dollar or the mark. Other rebuilding, domestic-oriented industries were protected from foreign competition through high tariff barriers.
As the yen revalued, however, all of these became relative losers to banks, property companies, importers–that is, firms that had either purely yen exposure or, even better, revenues in yen with costs in dollars or other weakening currencies.
This is the blueprint every successful emerging market since then has employed.
The current administration’s economic policy in the US reminds me a lot of 1950s Japan–depress the foreign exchange value of the dollar (in the US case, by trying to force the Fed to lower interest rates) and, through tariffs, raising the local economy cost of imports. Both of these lower the local standard of living while stimulating industry.
I have no idea what makes this tried and true up-from-poverty strategy a good idea for the US today–especially when action to stimulate local industry is coupled with efforts to reduce the working population, which pushes in the opposite direction. I don’t see, either, the patriotic call for self-sacrifice to make things better for the next generation. Very worrisome if Washington doesn’t know. In any event, this is what it’s doing.
The investment implications are clear:
the key to success is having foreign revenues and domestic costs. And even though the overall US stock market has been a distinct world laggard, owning export-oriented or import-competing businesses has been significantly better than owning stocks in foreign markets.
2. Hong Kong under Xi
Hong Kong has a colorful, if that’s the right word, history. Back in the Queen Victoria days, the British army invaded China to force it to buy British opium (from India)–a major source of foreign exchange for England. It also seized Hong Kong for dealers to use as a port of entry, ultimately forcing China to grant a 99-year lease on the surrounding area that terminated in 1997.
In 1982, Deng announced that the lease would not be renewed. In the negotiations that followed, China agreed that Hong Kong would remain a relatively autonomous ” Special Economic Region” until 2047, then revert to mainland control. The Deng years were ones of immense prosperity for China, as well as for Hong Kong–which became the headquarters/meeting place for domestic Chinese firms and foreign multi-nationals hoping to partner with them. It was an equity investor’s paradise, as well.
Deng’s successor Xi, a more old school Maoist, reacted violently to pro-democracy protests in the years just after his becoming head of the Chinese Communist Party in 2012. He ultimately tore up the Deng agreement, imposed much more draconian Chinese law, jailed protestors (sometimes after mainland court proceedings) and replaced elected officials with his minions. Kind of a repeat of Mao’s “reeducation’ efforts.
The result was an immense loss of stature for Hong Kong and its publicly traded companies, in the eyes of international investors–who, for the first time, had to worry about their own personal safety if they visited–as well as the economic and legal status of the company stock they might buy on the Hong Kong exchange.
what’s key here
In my view, none of this is as bad, from a reputational point of view, as ICE in Minnesota. On the other hand, I don’t think the negative effects on the S&P will be as severe as they were for the Hang Seng index. My guess is that the main result will be an intensification of the US costs/foreign revenue theme, with maybe an intensification of the idea that consumers will increasingly trade down as their economic circumstances weaken.