Monday, February 29, 2016

Asia the place to be over the next several decades (Where will the puck be)



The US middle class population is expected to be largely static – reasonably so, since it represents a mature economy. Ditto that of Europe. The middle class populations of South America and Africa are forecast to grow somewhat, albeit from a very low base. But if the OECD is correct, the middle class population of Asia is forecast to explode – from roughly 500 million people today to something like 3 billion people over the next two decades. If this comes to pass it will constitute the greatest creation of wealth in human history. So owning the shares of businesses catering to that emerging middle class is a plausible investment thesis – especially if the shares of those businesses can be bought at attractive prices.

Whereas the US equity market has seen its price / book ratio virtually double since the Global Financial Crisis, the price / book ratio for Asia remains at close to its post-Lehman lows. Given the anticipated growth in wealth there over the longer term, that looks like an opportunity.


You can either buy an expensive market like that of the US (where the Shiller p/e stands at 25 times versus a long run average of 16) and where future growth may well disappoint, or you can buy high quality businesses in an inexpensive market – like that of Asia – with realistic expectations of high growth over the medium term, allied with the sort of compelling ‘value’ metrics shown above. But it’s hardly a fair fight.

This is why I am very optimistic about frontier markets like Myanmar, Mongolia, and even North Korea. You just have to take a position and hold on which takes patience and is something most people do not have the patience to do. 

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