Wall St returns are good, but watch China

The Business Times ^ | January 2, 2002 | Teh Hooi Ling

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HERE'S a sobering fact. If you had invested $1,000 in the Singapore stock market in 1985, and taken the Straits Times Index as a proxy, your money would have grown to $2,613 today.

But the same $1,000 invested in the US market or the Dow Jones Industrial Average would have ballooned to $8,509.

While the annual compounded returns of 5.8 per cent over the last 17 years in the Singapore market are still respectable when compared with fixed deposit interest rates, they are nowhere nearly as rewarding as the returns from the US market of 13.4 per cent per annum.

Furthermore, the daily standard deviation - a measure of volatility or risk - for the Singapore market is 1.5 per cent against 1.1 per cent for the US market.

In other words, not only does the US market give higher returns, it is also less risky. Thus on a risk-adjusted basis, the US is a far more appealing market than Singapore.

This then begs the question, is there any incentive to invest in the Singapore market at all?

To answer that multi-billion dollar question, we have to ask ourselves the reason for the outperformance of the US market.

A company's share price appreciates when its profit grows. And profit grows when the company can sell its products to a bigger market.

Over the last two decades, the over-riding business trend has been globalisation and liberalisation of trade.

In an environment where everyone is free to compete, undoubtedly the ones with the keenest competitive edge, or the world-beaters, will prosper. And we have found that currently, the bulk of the world-beaters are American companies.

US corporations have a number of advantages to begin with.

Chief of these is the fact that they have a huge domestic market. By the time they join the ranks of the top 10 companies in their own country, they would have already conquered half the world, figuratively speaking.

Flying start: They would have attained an economy of scale that would make them competitive globally, they would have honed their marketing skills and they would have amassed the cash needed to break into new markets.

Contrast that with companies in Singapore, or for that matter, companies in any emerging market. Up until recently, most of them were operating in cosy and protected markets. With liberalisation sweeping across the globe, the DBSs and Yeo Hiap Sengs of the world now have to slug it out with Citibank and Coca-Cola in their home turfs.

Earnings worries in the face of keen competition no doubt have capped the appreciation of domestic companies' share prices.

Operating in the confines of their own countries, and lacking the resources to rise to become world-beaters, and assuming that they don't lose market share to the world-beaters, the best these domestic-based companies can hope for is to grow in tandem with the domestic population and thus economy.

Assuming a population growth of 3 per cent, coupled with inflation of another 2 or 3 per cent, we have an annual growth of about 6 per cent - not far off from what was registered on the Straits Times Index in the last 17 years.

The question now is, will US companies, and thus its stock market, continue their winning ways? It would appear so. After all, the liberalisation trend is still intact and now the most prized market, China, is opening up as well.

But herein also lies the catch. The huge domestic market in China - under the right atmosphere and given time - could, like the US, breed the next generations of world-beaters.

The Chinese government is definitely fostering the right environment for businesses to flourish and the time factor will depend on how diligently China abides by the requirements of the World Trade Organization.

Already, companies like telecoms infrastructure manufacturer Huawei, home appliance maker Haier and beer brewer Qingdao are making headway in the global marketplace.

The Chinese are an enterprising lot. And the law of large numbers dictates that they will have more talent than any other country in the world.

But there is still one element that China lacks and that will need years to master: the soft skill of public relations and the marketing panache of US companies.

So an educated guess would be that US companies, and by extension its stock market, will continue to outperform the smaller emerging markets over the next five to 10 years.

Winning tactics: And the best strategy to take advantage of that is to buy into a US market index fund, putting money in on a regular basis and holding it over a five-to-10 year horizon.

As for the Singapore market, although the long-term growth trend is about 6 per cent, there is a tendency for the market to overshoot both on the upside as well as the downside. An active trading strategy may thus yield a much better return.

For those preferring to buy and hold, they would do well to pick companies which have shown competitive strengths in niche markets in the world.

Finally, no investor should ignore China. But until corporate governance and transparency of China-listed companies matches those of the developed world, a better strategy at present would be to gain exposure through foreign-listed companies which derive much of their sales from Chinese consumers.

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The guys who challenge the party, and are successful, are challenging it from the inside out.

Anything percieved as 'outside-in' is not well recieved.

Seeing how the first statement in this post is true, that is why things are not always as they seem. While labeled "communist" Party, that might not be true in the real ideologically restrictive sense of the word, at least some elements that is.

That is kind of what I have been saying all along.

China is not a big one thought one thinking kind of place. America has some friends in China, especially those who are not tied up in Communist thought, Mao etc. America also has enemies in China who ARE tied up in such things such as beligerant radical thought and beliefs of the boogey man out to get them. The good thing for the former group is that reform is in vogue. Its been prooven to work, and the other has been prooven not to improve anyone's life. But hey, since when did being wrong stop a revolution or a fight over who has power?

It definately leaves mixed feelings sometimes.