No matter where you stand on the political spectrum, you must admit that George Soros’ investment track record has made him the equivalent of a .400 hitter in baseball. Yet, in a decade that has been lousy for all investors, even the “Grandaddy of Hedge Fund Managers” has had it tough. 2010 was Soros’ worst year since 2002, with his flagship fund up a mere 2.63%. That’s worse than the 8% gain he booked in the meltdown year of 2008, when many rivals were down by 30% or more.
Ten years ago, both Soros and Buffett boasted enviable “30:30” track records: average annual returns of 30% over a period of 30 years. Today, those long-term returns have shrunk to closer to “20:40” track records: 20% annually over 40 years. A top-performing new money manager of the last decade, Bruce Berkowitz, has produced an annualized return of 11.6%. Granted, that’s over a span in which the S&P 500 has risen a mere 0.7% a year on average. But it’s a far cry from the glory days of the young Paul Tudor Jones, racking up five consecutive 100%-plus years. No wonder a lot of the original hedge fund greats are calling it quits, as Soros’ former protégé Stan Druckenmiller did last summer, frustrated by his inability to generate significant market returns.
So will any investor ever again dominate the financial markets the way Soros and Buffett did between the mid-1960s and the dotcom meltdown of 2000?
The short answer is “no”…
And here’s why…
How a Dead Paleontologist Explains George Soros’ Fading Returns
In his 1996 book, “Full House: The Spread of Excellence from Plato to Darwin,” the late Harvard paleontologist Stephen Jay Gould examined the question of why baseball had not produced a .400 hitter since Ted Williams in 1941. The Wall Street Journal recently mused whether Gould’s analysis could be applied to the fading dominance of Tiger Woods in the golf world. That got me thinking whether Gould’s rationale could explain the similarly fading returns of the world’s top investors.
Gould’s argument is straightforward. The overall quality of performance in baseball has improved over time. That makes achieving “outlier” performances like a .400 batting average less likely. On the one hand, it became harder for batters to get on base as pitchers mastered new pitches like the slider; bigger gloves improved fielding; and managers became increasingly savvy. On the other hand, batters have also become bigger, spending less time brawling in bars and more time pushing barbells — and even popping steroids. (Presumably, Gould’s analysis does not apply to swimmers like Michael Phelps, because they are competing against the clock, and not against increasingly able opponents.)
As everyone ups the quality of his game, the top players are performing closer and closer to what is humanly possible. That means less room for “variation” at the extreme edges of the performance bell curve, i.e., where .400 hitters sit.
The bottom line? As Gould puts it, the “truly superb cannot soar so far above the ordinary.”
What Stephen Jay Gould Would Say about Investing
You don’t need to be a Wall Street rocket scientist to apply Gould’s thinking to investment returns. While Soros couldn’t pass his Chartered Financial Analyst (CFA) exams, today there are tens of thousands of CFAs on Wall Street. Formerly secretive “Turtle Trading” trend-following systems are now available for free on the Internet. Tens of thousands of George Soros wannabes have paged and parsed through the grand master’s classic “The Alchemy of Finance.” Paul Tudor Jones summed it up best in his forward to Soros’ book, quoting George C. Scott from the movie “Patton,” as the U.S. general looked out on the tank formations of his German nemesis: “Rommel, you magnificent bastard! I read your book!”
Soros has inspired a whole new generation of hedge fund managers whose own competitive streak made the likelihood of “30:30” track records ever more difficult. Throw in the small army of “rocket scientists” at shops like Renaissance Technologies, D.E. Shaw and Goldman Sachs sucking out every tidbit of pricing inefficiency in the market… and the prospects of the world’s George Soros wannabes look even bleaker. Soros himself described his early career when he focused on mispriced European securities as being a “one-eyed king among the blind.”
Soros: One of a Kind?
Why “30:30” Track Records Are a Thing of the Past
The advent of 24/7 information about markets alone is clearly insufficient to generate outsized gains. Nor is sophisticated financial analysis. Skeptics argue that Wall Street’s army of CFAs and PhDs gave it a misplaced sense of self-confidence by shoehorning irrational human behavior into a complex-looking but inaccurate matrix of undergraduate physics equations. That, in turn, led to excessive risk-taking, which blew up in the financial world in 2008. Meanwhile, self-proclaimed “dinosaurs” like Soros had a “great crisis.”
There are, of course, thousands of small-time traders who crank out Soros-like 30% per year returns. But that’s like comparing a star high school quarterback to, say, NFL great Joe Montana. There’s a big difference between trading small time versus cranking out 30%+ returns, as Soros and Buffett did, year-in, year-out for 30 years.
Investors — like movies and books and pop bands — live in a world of what Nassim Nicholas Taleb calls “Extremistan.” Financial markets will always throw up a “star du jour.” Just look at the case of Bill Miller. A back-of-the-envelope calculation suggests that any sustained outperformance by a U.S. fund of its benchmark index should end right around 13 or 14 years — which is just about the time that Bill Miller’s fund at Legg Mason fell off the performance wagon. Since then, his fund has lost nearly 40%, whereas the S&P 500 has had a slightly positive return.
And then there is an issue of scale. You can day trade your way to huge returns on a small scale through trading services like my own Global Bull Market Alert. But you can’t do it with $100 million, let alone $10 billion dollars.
Gould did not exclude the statistical possibility that you could see another .400 hitter in baseball. Nor can you exclude the possibility of another George Soros or Warren Buffett. But another investor with a “30:30” track record would be what Gould would call “a consummate rarity.”
As for my view on any single investor’s chance of replicating the “30:30” track records of Soros and Buffett in the financial future?
Much like BRIC rival Russia, Pakistan has an image as global troublemaker. The country veers regularly between weak civilian and military governments, none of them particularly confidence-inspiring. It has threatened to use its nuclear arsenal against India and, until recently, was selling these secrets to North Korea, Iran and Libya. Outside of major cities like Islamabad, Karachi and Lahore, most of the country is in chaos. The Pakistani army is bogged down waging war against the militant fundamentalist Taliban in the tribal areas bordering Afghanistan. Baluchistan, a province that makes up almost half of Pakistan’s land mass, is home to yet another insurgency. Meanwhile, thousands of young men are training for jihad at radical Islamic schools that dot the country — all in support of Pakistan’s most famous (likely) resident, Osama bin Laden.
Yet, much like Russia, Pakistan also has been one of the top-performing stock markets over the past decade. Had you been able to invest in the Karachi Stock Exchange at the turn of the millennium, you’d be sitting on a much bigger pile of profits than, say, if you had invested in the “China miracle.” Pakistan offers yet another lesson in how gleaming skyscrapers offer little guidance in predicting future stock market performance.
Investing in Pakistan: Surprisingly Big
Teeming with 169 million souls, Pakistan is the world’s sixth-largest country by population. That makes it smaller than Brazil , but larger that Russia, as well as the “Next BRIC” candidates, Turkey, Mexico, South Korea and Egypt. Bordered by Afghanistan and Iran in the West, India in the East and China in the far Northeast, Pakistan is just about the size of France and the United Kingdom combined.
Pakistan’s real per capita GDP of about $1,250 makes your average Pakistani slightly poorer than his counterpart in India — and far behind the average in booming China. One third of Pakistan’s population lives in poverty, and only half of the population is literate. Yet, Standard Chartered bank estimates that Pakistan has a middle class of 30 million that now earns an average of about $10,000 per year. And adjusted for purchasing power parity (PPP), Pakistan’s per capita GDP approaches $3,000 per head. But take away that bit of economic affirmative action, and Pakistan’s economy drops from the size of New Jersey’s down to that of Alabama.
Investing in Pakistan: Edgy Relations with Uncle Sam
In the bad old days of the Soviet Union, Pakistan was a major U.S. ally. That relationship soured after the United States imposed sanctions on Pakistan after it refused to abandon its nuclear program. The “War on Terror” changed all that. After Pakistan ended its support of the Taliban regime in Kabul, American economic and military aid to Pakistan soared to more than $4 billion within three years of the 9/11 attacks. Indeed, American aid has played no small part in helping Pakistan’s economy flourish over the past decade or so.
But as with most forms of handouts, gratitude is the least heartfelt of emotions. Anti-Americanism in Pakistan’s free media is just about as virulent as neighboring Iran. The Wall Street Journal’s Pakistan correspondent was ejected from the country after being charged with spying for the United States and Israel. The U.S. State Department advises U.S. citizens not to visit the country and has forbidden the families of its diplomats in Pakistan to visit since 2002.
Investing in Pakistan: A Solid Start to the Millennium
Economically, the first decade of the 21st century has been good to Pakistan. Thanks to economic reforms introduced in 2000 by the former Musharraf government, Pakistan has privatized $5-billion worth of assets, simplified its tax system and attracted large amounts of foreign direct investment (FDI) compared to its GDP. By mid-2005, the Pakistani economy was growing by 8.6%, and the World Bank named Pakistan as the top reformer in its region and among the top 10 reformers globally.
That changed abruptly with the onset of the “Great Recession.” Pakistan’s ensuing balance-of-payments crisis and runaway inflation forced the IMF to step in, and offer a $7.6-billion emergency financing package in late 2008. To its credit, the Pakistani government kept its side of the bargain, maintaining its foreign exchange reserves above target and its fiscal deficit below. The Pakistani economic crisis has eased substantially, and in 2010, the economy is expected to grow at least 4%.
Investing in Pakistan: Limited Access for U.S. Investors
There are all sorts of reasons why U.S. investors are unlikely ever to go gaga over investment opportunities in Pakistan. But surprisingly, other investors have. The stock market index in Karachi has risen by more than 1,000% since 1999. And in 2002, Pakistan was the top-performing stock market in the world.
But even if you develop a rare appetite for Pakistani stocks, they are not easy to access, even by frontier market standards. There are a handful of Pakistani stocks that are traded over the counter in the United States. And Pakistan Telecom has been a core holding in many emerging-market funds for many years. Claymore’s BNY Mellon Frontier Markets ETF ( FRN ) has an allocation of only 0.5% to Pakistan. The most recent addition to the Pakistani investment palate is Global X Management’s announcement that it intends to launch a Pakistani ETF in the near future.
Bottom line? Pakistan has a long way to go. The Commission on Growth and Development once estimated that Pakistan needs 159 years to catch up with industrialized nations. But two years ago, Merrill Lynch’s Chief Asia Strategist picked Pakistan as his top investment prospect among the world’s frontier markets. And as the performance of Pakistan over the past decade has shown, big investment profits can lie in the most unlikely of places.
Strategically ensconced between the European West and the Islamic East, Turkeyis a country of just over 72 million people — roughly twice the population of California. The unheralded “economic tiger” of emerging markets, Turkey grew at an average rate of 7.5% between 2002 and 2006, faster than any other OECDcountry in the past five years. In 2000, Turkey’s GDP stood at $250 billion. Today, it has reached $600 billion. According to Forbes magazine, Istanbul, Turkey’s financial capital, boasts an eye-popping 34 billionaires. That puts it fourth in the world behind Moscow, New York City, and London, ranking it ahead of Asian and U.S. giants like Hong Kong, Los Angeles, Mumbai, San Francisco, Dallas and Tokyo.
A Remarkable Economic Turnaround…
As with Brazil, global investors used to joke that “Turkey is the country of the future, and always will be.” Saddled with 80%-plus inflation rates and macroeconomic policy reminiscent of Latin America in the 1970s, Turkey was a poster child for economic instability throughout much of the 1990s. It was remarkably reliable in only one (unflattering) way. Sure as day follows night, you could always count on Turkey’s economy — and stock market — to blow up on a regular basis.
That all has changed over the last decade. Since its last serious, domestically induced economic crisis in 2001, Turkey has been run by a largely pro-business, single-party government headed by Prime Minister Recep Tayyip Erdogan. And the ensuing political and economic stability has altered the country’s investment landscape beyond recognition.
On the political front, Erdogan’s neo-Islamist Justice and Development party has a publicly stated goal of joining the European Union. Although more cosmopolitan Turks are less than enamored with the party’s political leanings, Erdogan’s reforms have reversed decades of corruption, economic instability and a disturbing authoritarian streak in government. And on the economic front, IMF-backed reforms implemented after the 2001 financial crisis introduced wide-ranging structural changes, including cuts in government spending, acceleration of privatization and introduction of corporate tax cuts.
The results of these reforms have been impressive. After decades of double-digit percentage increases, core inflation in Turkey hovers around 5% — the lowest levels since 1970 and close to the IMF-agreed target of 4%. According to investment bank Morgan Stanley, Turkish labor productivity has risen by 42.5% between 2002 and 2008. Business investment spending has jumped by 120%. Corporate profitability has soared. Even more remarkable is that Turkey’s record growth has been achieved against the head wind of tight monetary policy, with real interest rates substantially higher than in other OECD countries.
Over the past few years, Turkey also has enjoyed an unprecedented inflow of foreign direct investment (FDI). The $10 billion that poured in during 2005 was more than during all of the years of the previous decade combined. This doubled to $22.1 billion by 2007 before dropping back to $17.7 billion in 2008. Much of the FDI boom reflects foreign investors’ optimism that Turkey is set for a sustained period of economic growth and structural reform. Increased FDI and foreign ownership also generally mean more effective corporate governance, better transparency, and improved implementation of existing laws.
In many ways, Turkey weathered the credit crunch better than other emerging economies. Partly thanks to tough regulation, not a single Turkish bank has gone under. Unlike many Western banks, they have few toxic assets and limited mortgage exposure. By Q4 of 2009, the Turkish economy grew at an annual rate of 6%, as Germany and France, the two largest export markets for Turkey in the eurozone, recovered.
Turkey: A Volatile Ride for Investors…
U.S. retail investors have not been able to invest in the Turkish stock market as a whole until recently, with the iShares MSCI Turkey Invest Mkt Index (TUR) only launched in June 2008. Over the past 12 months, this ETF is up 132.4%.
But as impressive as this one-year chart versus the S&P 500 looks, it masks some stomach-churning volatility, including a close to 20% drop in the market in the last weeks of January and early February. But after enduring another sharp pullback in early March after the news of the arrest of some military officials who plotted a coup back in 2003, the Turkish market is back on track, recently breaking out to new highs.
But therein lies an important lesson if you invest in Turkey. Although it has gotten its macroeconomic act together, Turkey will always test your investment mettle. Strap yourself in, and hang on for the ride.
The BRIC economies of Brazil, Russia, India and China may lay claim to the world’s economic future. But BRICs aren’t necessarily the top performers in the global stock market stakes. After a blistering 2009, the Brazilian stock market appears to have run out of steam. China’s stock market has been among the worst performers on the planet over the last six months. Only Russia and India are showing positive returns in 2010 — and both are underperforming the uncharacteristically strong U.S. stock market.
The Next BRICs: The “N11”
When Goldman Sachs economist Jim O’Neill anointed the BRIC economies back in 2001, his choice of countries to include wasn’t as obvious as it may seem today. If China and India were no brainers just by dint of their sheer size, countries like Indonesia and Mexico could have made the case to be included as much as Brazil or Russia.
So in 2005, Jim O’Neill and his colleagues compiled a list called the “Next 11” (N11)— countries Goldman Sachs thinks can rival the BRICs in terms of investment prospects over the coming decades. Goldman Sachs’ list includes Bangladesh, Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey and Vietnam.
The N11 markets are still mostly off of the screens of U.S. investors. But thanks to an explosion in ETFs over the past year or so, you now can access six of the top N11 stock markets — Indonesia, Mexico, South Korea, Vietnam, Turkey and Egypt. And with both a Philippine and Pakistani ETF in the works, that palate of investment opportunities is set to increase.
The BRICs will likely dominate the landscape of the global economy just by the dint of their sheer size. But great fortunes are made by buying undervalued assets low and selling overvalued assets high. And it’s likely that several of the up-and-coming N11 countries will put more money in your brokerage account than investing in the high-profile BRIC countries that grace the covers of magazines.
I covered two of the N11 markets — South Korea and Mexico — in recent editions of The Global Guru. Over the coming weeks, I’ll be covering each of the eight N11 economies that you can — or soon will be able to — invest in with a click of the mouse.
Indonesia: The Fifth “BRIC”?
As the world’s largest Muslim nation with a population of almost 248 million, Indonesia is the fourth-most populous country in the world after China, India, and the United States. Already among the top 20 economies in the world in terms of GDP, the Indonesian economy grew at more than 4% in 2009, making it one of only a handful of major economies to grow through the “Great Recession.” With its abundant natural resources, Indonesia has recently also benefited tremendously from the China-driven commodities boom.
Much of the credit for the recent rise goes to Indonesia’s President Susilo Bambang Yudhoyono, known better by his initials SBY, a former army general who last year won a landslide re-election as Indonesia’s president for a second, five-year term. Since taking office in 2003, the current government has ended its civil war with renegade provinces; brought state spending under control; and launched a popular anti-corruption drive, jailing senior politicians and central bank officials. Indonesian President SBY’s ambitious plans for Indonesia over the next five years include pledges to boost economic growth to 7% by 2014, reduce the poverty level to 8%, and decrease unemployment to 5%. The government believes that a stable administration, lower capital costs and a government plan to spend as much as $34 billion to build roads, ports and power plants by 2017 will combine to almost double Indonesia’s $433-billion economy in the next five years to $800 billion. These are big goals. Indonesia last experienced a 7% growth rate in 1996, just prior to the 1997-98 Asian financial crisis.
All of this is a remarkable turnaround for a country that, after the Asian crisis of 1997, was widely viewed as Asia’s biggest basket case. Foreign investors stayed clear. Western analysts viewed Indonesia as the next Pakistan, rather than the next China. But after the collapse of the Suharto regime, Indonesia enacted sound fiscal and monetary policies that led to a relatively quick recovery and years of strong growth. And unlike many developed and developing countries that binged on debt, Indonesia worked hard to reduce its government debt-to-GDP ratio. Since 1999, government debt as a percentage of GDP has declined to about 30%. Hard currency reserves grew from $36.3 billion to $56.9 billion, even as per capita income doubled during SBY’s first term to $2,237 in 2008. Indonesia remained one of the few countries in the world with budget deficits that are lower than 3.0% of GDP.
Morgan Stanley has proposed that as Southeast Asia’s largest economy, Indonesia should be the next country to join the elite group of BRIC (Brazil, Russia, India, China) emerging economic powers. Indonesian government officials have embraced the same message. As Emil Salim, a presidential adviser and former cabinet minister summed it up: “Our target is to put another ‘I’ into BRIC… Achieving that in five years is possible.”
Indonesia: The World’s No. 1 Stock Market?
Indonesia has been off the radar for most investors. But Indonesia is one of the few global markets that managed to maintain its momentum into 2010, with the benchmark Jakarta composite Index hitting an all-time high in recent days. The Van Eck’s Market Vectors Indonesia ETF (IDX) has more than doubled since its launch — far outpacing the U.S. S&P 500 (GSPC), and outperforming even BRIC star Brazil. It’s also been the single-best performer in Q1 of 2010.
Old Asia hands often react with skepticism when I speak about investment opportunities like Indonesia at investment forums like the Las Vegas Money Show. After all, for all of its progress, Indonesia is a deeply corrupt place with many challenges to overcome. But in many ways, Russia could be described in the same way. Yet Russia has been by far the best performing among the BRIC economies’ stock markets over the past ten years.
In the topsy-turvy world of global investments, it would not surprise me if Indonesia took Russia’s crown for top performer over the next ten years.
The Governor and Company of The Bank of Ireland (IRE)
National Bank of Greece SA (NBG)
iShares MSCI Japan Index (EWJ)
ProShares UltraShort FTSE China 25 (FXP)
Market Vectors Russia ETF (RSX)
“Are you crazy…?”
That was the reaction I got from a prominent London investor at a recent holiday fundraiser when, oiled by a few too many cocktails, I made the mistake of revealing that I was yet again spending my Christmas holidays in Florida looking at real estate investments.
His reaction was understandable. After all, “everyone” knows that Florida — and the United States as a whole — is going to hell in a handbasket. And if you think the real estate market in the United States is bad now, he told me, wait until mortgage rates rise 300 basis points, U.S. mortgages lose their tax deductibility to finance Obamacare and 80 million baby boomers downsize their houses simultaneously. All this, he told me triumphantly, is a recipe for a collapse in U.S. housing for the next generation.
Frankly, I’d heard it all before. And his reaction merely reinforced my decision to tackle the maze of bureaucracy to try to buy some properties out of foreclosure in the Sunshine State.
Are You Crazy?
“Are you crazy?” is the same reaction I heard about investing in Russia after its collapse in 1998. Everyone from Warren Buffett, George Soros and Jim Rogers concurred with one investor’s sentiment that “I would rather eat nuclear waste than invest in Russia.”
Yet, Russia — the bad boy among the BRICs — has outperformed media darlings Brazil and China by a country mile over the past decade or so. In fact, Warren Buffett would be a richer man today had he piled into the “world’s biggest kleptocracy” — as his partner Charlie Munger called Russia — in the midst of Russia’s financial crisis in 1998. The Russian stock market’s 25%-plus annual return since its collapse has far outperformed Berkshire Hathaway over the past 12 years.
Yet, when I speak to my subscribers at Global Stock Investor, many simply ignore any recommendations related to Russia. Some of my investors at my firm Global Guru Capital don’t allow me to invest in any stocks in the country.
This has led me to formulate the “Are you crazy?” Rule of Investing.
Here’s what it says:
“The more people think you are crazy for investing in something, the more money you are likely to make.”
When you describe an investment to your friends, the best reaction should not be:
“What a great idea! How can I get in on this?”
It should be:
“Are you crazy?”
Let’s face it. It’s fun and easy to invest in a “good story stock.”
That’s what makes technology or biotech so exciting.
It’s exciting to be involved with a company developing a cure for cancer or some new technology — and one that could make you 10 or even 100 times your money.
These are the success stories that make it into business magazines — or in the case of Facebook, onto the big screen in movies like “The Social Network.”
But the reality is that when you invest in almost any of these companies, you are simply buying an expensive lottery ticket, with slightly better odds.
Venture capitalists know this — and are counting on the one “Google” to make up for the dozens and dozens of “Pets.coms.”
Today’s stock market also has its share of speculative-story stocks — “no brainers” that seem to be the key to untold riches.
Facebook offers a perfect example.
On Sunday, Goldman Sachs announced that it had invested $450 million in Facebook — valuing the social-networking company at $50 billion, making it worth more than eBay Inc. (EBAY), Yahoo! Inc. (YHOO) and Time Warner Inc. (TWX).
Yet investors are clamoring to get into Facebook as its shares have been trading privately for years. In fact, Goldman is likely acquiring stock to make it available to the company’s best clients.
Facebook may turn out to be a profitable investment. Yet, at a $50-billion valuation, you have to wonder what kind of upside there is in the stock.
One thing is for sure. It’s unlikely that if you get your hands on some pre-IPO Facebook stock, you’re going to get the “Are you crazy?” reaction I got for considering investing in Florida real estate.
That tells me that there are better places to put your money.
My list of “Are You Crazy?” Investments
So what are some “Are you Crazy?” investments today — ones that your friends would look at you funny for even thinking about?
1. The Governor and Company of The Bank of Ireland (IRE)
National Bank of Greece SA (NBG)
The worst of Europe’s PIGS won’t disappear off of the map and will be bailed out — much like Citibank (C) and Bank of America (BAC) in the United States. Stock selection is a key, though. Bet wrong — like some investors recently did on the now-nationalized Allied Irish Bank (AIB) — and you’re on your way to the poorhouse.
2. iShares MSCI Japan Index (EWJ)
With a stable society, advanced technology and world-class companies, Japan, the “China” of its day, finally may have turned the corner after a 20-year bear market.
3. ProShares UltraShort FTSE China 25 (FXP)
China has had a great run. But let’s keep it in perspective. Among China’s 1.3-billion citizens, only 60 million of them earn a $20,000 middle-class annual income, while 440 million make $3-$6/day and 600 million take in less than $3/day. China’s cocktail of malinvestment, a coming real estate collapse and “crony Communism” will end up costing investors a lot of money.
4. Market Vectors Russia ETF (RSX)
As the cheapest major stock market in the world trading in single-digit P/Es, and a “Wild East” mentality notwithstanding, you’ll double your money in this market quicker than in any of the other BRIC economies.
5. U.S. Real Estate
With gross yields on properties routinely at 12%-plus, and most rentals generating positive cash flows from Day One, the U.S. real estate market is one of the best places on the planet to park your money.
So what about that London investor who called me crazy for investing in Florida real estate?
Well, he just put in offers on a handful of Miami condos, and even is looking at acquiring a small building in Miami Beach.
I may be “crazy.”
But at least I’m no longer alone…
Hong Kong: China’s Capitalist Success Story
Hong Kong is a paradox. Although it reverted back to Communist China’s rule in 1997, Hong Kong has remained the “freest” economy in the world for 15 consecutive years, as ranked by the Index of Economic Freedom. As one of the original Asian Tigers, Hong Kong also is one of the world’s great economic success stories. Its GDP per capita not only soared 87-fold between 1961 and 1997, but also by 2010 Hong Kong had successfully transformed itself into one of the world’s leading financial centers. Despite the global economic slowdown last year, this city of only seven million attracted over $60 billion in foreign direct investment in 2008 — more than twice the figure of India, a country with 157 times Hong Kong’s population.
Hong Kong’s liberal tax regime, respect for property rights, flexible labor market, and highly motivated workforce have all combined to make this city-state one of the world’s most prosperous economies. And as the only member of the original Asian Tigers that can claim to be the West’s gateway to mainland China, Hong Kong offers the prospect of a uniquely profitable investment in your portfolio.
Hong Kong: The World’s New Financial Center
If Asian Tiger rivals South Korea and Taiwan boast more developed technology sectors, and Singapore is arguably the world’s most attractive place to do business, Hong Kong is the only Asian Tiger to claim a role as a global financial center rivaling London and New York.
Hosting the largest initial public offering (IPO) in the world — China’s ICBC bank in 2006 — marked a watershed in the development of Hong Kong’s Stock Exchange. By 2009, Hong Kong had eclipsed the United States by raising $27.2 billion in IPOs — compared with only $26.5 billion in New York. Up until last year, the United States had dominated global IPOs in all but one year since 1995. London fell even further. Although the British capital was #1 in 2006, it did not even make the top 10 in 2009. And Hong Kong’s figure does not even include the high-profile but delayed $2.2-billion IPO from Rusal, the aluminium group controlled by Russian billionaire Oleg Deripaska — the first Russian group to be admitted to the exchange.
Hong Kong: The Asian Tigers’ Leading Stock Market
Hong Kong boasts by far the largest and most developed stock market among the Asian Tigers. But from a U.S. investor’s standpoint, the Hong Kong market benefits from another tailwind. Although it is thousands of miles away from Washington D.C., Hong Kong’s stock market is subject to wild “booms and busts” every time the Fed loosens monetary policy.
Here’s why. For the last 25 years, the Hong Kong dollar has been worth about $7.80, a level enforced through an interest-rate policy implemented by Hong Kong’s currency board. The result? Every time the Fed cuts real interest rates to zero — as it did in 1992-1993, and again in 2003-2005 — as the Hong Kong stock market has doubled. With the Fed firmly committed to its zero interest-rate policy, it’s likely to do so this time around, as well.
There are other reasons to be bullish about the Hong Kong market. After the collapse in global stock markets in 2008, Hong Kong stocks hit single-digit, price-to-earnings (P/E) ratios. In the past, every time the market collapsed to such low levels, Hong Kong stocks have gone on to double, and even triple, within a few years. Hong Kong also offers the most direct way for Western stock market investors to profit from the $585-billon Chinese stimulus package. And despite hitting five-month lows in the recent sell-off, like the other Asian Tigers, Hong Kong — through the iShares MSCI Hong Kong Index (EWH) — has comfortably outperformed both the U.S. S&P 500 and the mainland China’s Shanghai composite over the last 12 months.
The bottom line? For the attention given to mainland China, Hong Kong’s rule of law, free press, open markets, transparency, unfettered capital mobility, and a fully convertible currency have given it a distinct advantage over its mainland rival.
For now, at least, Hong Kong, an original Asian Tiger, has the upper hand.