Right now, the smart money is sitting on the sidelines. This is what Diane Brady, senior editor and content chief of Bloomberg Businessweek, suggested at a panel discussion at APEC earlier this month. The other speakers didn't entirely disagree, especially where Europe is concerned, but several suggested that the emerging markets are where smart money will be in the future.
The Deputy Prime Minister and Minister of Finance of New Zealand, Bill English, suggested that his country was a barometer for broader currents because it has such a small economy. New Zealand has been badly hit by the global economic downturn and in September its credit rating was downgraded. English said the situation changed on a daily basis. "At the moment it's quite schizophrenic," he said. "There's a lot of smart money sitting in safe banks -- and it can't stay there."
In China, by contrast, things are looking good. Anthony Nightingale, the managing director of Jardine Matheson Holdings, said that when he first visited the country in 1975, life there was extremely restricted. He recalled how everyone wore the same clothes and only four colors were permitted. Ever since China's entry into the WTO, things have changed dramatically. "China is engaged in the most amazing transformation," Nightingale said.
China also faces challenges, as the government tries to steer growth from being export-based and dependant on public spending, to growth that is fueled by consumerism. China's overheated property market, especially residential property, has been garnering some anxious headlines, but even here, Nightingale was sanguine. He pointed out that large numbers of people are continuing to flood into the cities all the time. "There is rising wealth," he said. "So actually the demand will meet the supply. It is still a very attractive place to invest."
On Europe there was less certainty however. Three scenarios are possible. 1) An optimistic scenario: Europeans develop a common fiscal policy and the ECB supports weak countries. 2) Politicians muddle through and it's not good but neither is it disastrous. Or 3) The scary scenario: Italy defaults messily and the European markets are badly depressed. "In that scenario even East Asia would have a lot of contagion," according to Nightingale, who thought the second option -- of muddling through -- was the most likely to become reality.
But Europe's difficulties create opportunities for others. Kirill Dmitriev, the CEO of the Russian Direct Investment Fund, argued that the emerging markets can be agents of growth. Right now, he said, Russia is implementing the largest privatization program in its history and it welcomes foreign investment. "Capitalism is only twenty years old but the government is decisive and focused," he said. Referring obliquely to Europe and the US he added, "In Russia there is no paralysis of decision-making. Once decisions are made they quickly get implemented and in a time of crisis that's a big benefit."
Such change brings its own complications. Dr. Jerry Webman, chief economist at Oppenheimer Funds, noted that when it comes to new companies in East Asia, the investing experience can sometimes be fraught. Micro-investment decisions are hindered by macro-factors that may be cultural or legal, and he mentioned the issues around intellectual property rights as one striking example.
Despite the current problems, there was still some optimism about the future of western economies. Nightingale urged the audience not to underestimate the US. Congress is dysfunctional, he admitted -- but anyone who doubts the ability of the American economy to regenerate itself is making a mistake. "At the end of the 1980s everybody said the US was finished," he pointed out. "Japan was going to conquer the world. Sadly Japan has never really recovered [from the nineties slump], but the US did. It came up with the internet."
The takeaway from the panel was to keep things in perspective, and not to become overly preoccupied with Europe's problems. Nightingale offered his listeners some advice: "When markets slump it brings opportunities -- so I would be alert to those."
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