A recent post by Vivian Lewis of Global Investing highlighted some interesting comments made by Guy Monson, CIO and Managing Partner of London-based investment manager Sarasin & Partners, while speaking at a conference in Singapore, in which he outlines the likely effects of a possible outcome to the November 11-12 G20 conference in Seoul:  “Although uncertain, a very positive outcome would be an announcement by the G20 that they have agreed to some cooling appreciation of the Renminbi along with some appreciation of other Asian currencies,” Monson said.  Yet this would be a “gradual and controlled rebalancing,” he warned, “requir[ing] 24-36 months to take effect, with Asia to experience extremely strong international liquidity inflows over the next 12-18 months.” 

Monson’s macro outlook and thesis is nicely laid out in the linked piece co-authored with Subitha Subramaniam, the firm’s Chief Economist and Partner.  His preference for global equities (both developed and developing) relies on the continuation of “sizeable” global imbalances which are destined to persist, he argues, “[since] stubbornly undervalued dollar pegs across Asia and the Middle East not only supply low dollar interest rates today, but also promise them in the future – an anaemic U.S. recovery is expected to delay interest rate normalisation well into 2011/2012.”  The result, Monson contends, “is a period of what we are terming ‘hyper-convergence,’ where already higher growth rates, due to favourable demographics and an ability to leapfrog technology generations, are magnified and propelled even higher by a powerful low interest rate shock, with negative or very low real interest rates creating a virtuous cycle of ‘hyper-growth.’”  Specifically, he articulates: 

“There are countless examples; retail sales are rising by an extraordinary 27% in India, 24% in Indonesia, and 17% in Turkey year on year, while capital spending is still rising more than 24% year on year in China, 19% in India, and 16% in Indonesia. All of those economies, along with most of the emerging world, are operating with real interest rates (after inflation) that are at or close to zero or, in China, India and Turkey’s cases, actually negative. In fact, with few ‘brakes’ to stop economies so long as currencies are pegged, growth is almost unstoppable, with intra-emerging market trade surging.”

 

While intra-EM trade may underpin further P/E rises among developing equities, “hyper-convergence is not trouble free,” Monson notes.  “It brings with it growing pains in the form of unsustainable increases in asset prices, and surging domestic wages and inflation.”  That said, as Goldman Sachs economist Robin Brooks noted, the propsensity of various Asian governments to accumulate surpluses as a percentage of its monetary base is varied, suggesting to me that the long-run ‘hangover’ of this artificial, dollar-pegged low-interest boom across the developing world will not be uniform, a thought investors should be mindful of.

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