Trend: Rising labor costs in China and other emerging economies in Asia will start changing the investing landscape.
Written by Louis Gave of GaveKal, Asia's Paradigm Shift focuses on some major changes occurring in Asian economies and the implications of those changes for investors. As wages start to grow faster than productivity, household consumption will increase to be a key driver of the Chinese economy. Excerpts below.
There can be almost no doubt that the sheer abundance of labor in the past two decades, which made it impossible for workers to bargain for a wage that matched the huge productivity growth being generated in industry, played a crucial supporting role to the processes described by Bai and Qian. But as labor becomes more scarce, wages will have to be bid up until they match or exceed the rate of productivity growth. This is what we are now witnessing all along China's coast (e.g.: Honda, Foxconn, etc...). Once wages grow faster than productivity, the labor income share of GDP will start to grow, and household consumption will begin to assume its rightful place as the main motor of the Chinese economy.
These are not easy times for Asian investors, what with global concerns weighing on markets (US double dip?, EMU solvency?, etc...), unprecedented cyclical adjustments (Asia now leading the tightening cycle), and a very important paradigm shift (the end of cheap labor in China). In the face of so many changes, one must remain nimble, and accept that being stubborn will not pay off. Instead, one has to remain very close to the market, identify where positive momentum is strongest--whether on earnings or share price performance--and question whether the momentum makes macro-sense before participating. Having said this, for us, a few key trends are already emerging. These include:
Asian currencies will remain well bid for the coming year and likely thereafter.
Long-dated Asian government bonds are increasingly the best hedge against equity risk for any portfolio. After all, if the twin 'fat-tail' threats to equity markets today are a) a double dip recession in the US and b) a solvency crisis in Europe, then long-dated Asian bonds can immunize the risk from either of these events... at least, this is what has happened in the past quarter!
Asian indices and ETFs are likely to suffer as the markets adjust to the new realities reviewed above; realities that are all too often under-represented in benchmarks. Investors deploying capital in Asia should do so with managers willing to stray massively from any benchmark.
Within the Asian equity markets, we would favor high-dividend yield paying stocks, utility stocks and stable growth stocks, especially those linked to the consumer.
Stocks linked to the infrastructure roll-out (steel, commodities, etc...) should be seen as a trade at best, or simply avoided, even if valuations now appear attractive. Such stocks were the main driver of the past decade's Asian boom. They will not be the leaders of the next decade.