As we enter a zone of uncertainty… – The Statesman

April is the cruelest month, so said the famous poet TS Eliot. But one wit remarked that June marks the end of May.

Who would have expected that British Prime Minister Theresa May would lose her majority in Parliament in the June election, which was supposed to strengthen her hand in negotiating Brexit with the European Union?

This expectation reversal was as big a shock as Brexit or Trumpism. May may have found her Ides of March in June. In sharp contrast, unlike earlier in the year when everyone was worried about France falling to populist rule under Marine le Pen, a fresh centrist candidate named Macron won, and was rewarded by a handsome legislative majority to carry out his promise to reform France.

In Bangkok this week to refresh memories of 2 July 1997, I was struck by how history seemed to rhyme in 10 year cycles. Next month would mark not only the 20th anniversary of the return of Hong Kong to China, but also the 20th anniversary of the Asian financial crisis, when the baht was devalued.

2007 also marked the 10th anniversary of the US sub-prime crisis, which together with the European debt crisis, caused a decade of low growth for the advanced economies.

Initially, investors hardly noticed the tremors from the subprime crisis. On 19 July 2007, the Dow Jones Industrial Average touched a record high of 14,000. After an adjustment in August to 13,000, the index dropped below 11,000 on September 15, 2008, following the Lehman failure. It fell to a record twelve-year low of 6,547 on 9 March 2009, recording a 53.2 per cent drop over this period. Similarly, the Hong Kong Hang Seng Index also crossed the 20,000 milestone on 28 December 2006 and rose to the all-time peak of 31,958 on 18 October 2007.

A year later, it lost 66.6 per cent to a low of 10,676 on 27 October 2008. Ten years later, both indices have once again touched record highs, with the Hang Seng recovering past the 26,000 mark this month, whereas the Dow hit a record peak of 21,528 this week.

Because this rally is essentially tech driven, even the NASDAQ index has surpassed its 2000 tech bubble peak of 5,048 to hit a new peak of 6,305 on 2 June 2017. These market gyrations suggest that another consolidation may be reached sometime soon, except we do not know the exact timing and the trigger.

All we know is the there are many risks out there, including policy uncertainties from whether the Fed would continue to raise interest rates, the sudden re-appearance of inflation and possible geopolitical or natural disaster events.

So far, market worries about Chinas high leverage issues seem to have receded with the stabilisation of US-China relations and better performance at the growth level.

All in all, the markets have priced in so far almost all the Brexit and Trump fears and did not react too much to the recent normalisation of Fed interest rates. The stark reality is that no one knows for sure whether we are in over-priced territory or bubble zone.

The US economy appears to trundle along in reasonable shape, with unemployment numbers reaching new lows. All we do know is asset prices are at record highs, financed by historically high debt and abnormally low interest rates. In this zone of radical uncertainty, we are no longer sure that the GDP indicator reflects the true state of the economy. GDP measures the old resource-based economy well, but does not capture growth in a datadigital economy.

No economy reflects this contradiction more than China, which has shifted from being the largest assembler of the global supply chain towards a consumption and service-driven economy. Both consumption and services crossed 50 per cent of GDP levels, moving closer towards an advanced country pattern where consumption and services account for roughly 60-70 per cent or more of GDP.

If China succeeds in this historic transition, with the old resource-consuming industries, like coal, steel, energy, being phased out, even as the new internet economy trims the inefficiencies in the current Chinese distribution system, then China could break through her middle-income trap. But one recalls that South Korea achieved OECD status in December 1996, only to fall into the Asian financial crisis in 1997/8. Mexico did the same in 1994.

All countries go through growing pains, especially what Austrian economist Schumpeterian called creative destruction.

This transition creates massive winners and also losers. We see this pattern being reflected in the mixture of top Dow Jones index component companies, whereby the leading tech stocks are being priced to win, whereas the old energy, manufacturing and distribution companies are struggling to maintain their market share. Given these radical uncertainties, history is replete with the rise and fall of nations, as well as the rise and fall of companies.

It teaches humility in forcing us to think holistically on the broader trends, whilst sorting out the signals from the noise. Emerging markets in Asia today are facing what is called a middle income trap whereby they need to break through a pain barrier to rise to advanced income status.

Advanced and aging economies countries like Britain and Japan face the opposite, a high income trap where if major policy mistakes are made, a rich country may slide into stagnation and possible lower income levels. Ultimately, demographics and geography determine destiny.

Asia may face many growing pains and a complex operating environment from disruptive technology and excessive competition, including geopolitical rivalry. Western analysts disdain for Asian demagogues is now being haunted by their own demagogues.

Basically, in the midst of these complex transitions through mega-trends, there is also a governance transition. The millennial generation is rapidly taking over in terms of consumption lifestyle, innovation and governance style.

History suggests that it will not be a bloodless transition. Despite all such noise, we should do well to remind ourselves that Asia is still where there is still demographic and technological growth.

Lets see whether the next market adjustment will stall or disrupt that growth trajectory. Happy 10th and 20th anniversaries!

The writer, a former Central banker, is Distinguished Fellow, Asia Global Institute, University of Hong Kong.

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As we enter a zone of uncertainty... - The Statesman