Investors turn east for higher returns in the coming decade
Investors are signaling that they are looking to Eastern markets to make higher returns over the next decade. With sclerotic predictions from MSCI and Vanguard for equities markets, retail and institutional market participants see countries in Asia as the new arena for long-term growth and returns.
For the last 100 years, western markets returned somewhere between 7 and 10 percent annually to investors in nominal terms, delivering a respectable 6 to 8 percent real yield. But now many observers believe that Asia will provide higher returns on average, owing to favorable profit environments and secular trends in those countries.
Asia has several natural advantages over Europe and North America during the 2020s. The region is starting from a lower base which economists believe will enable it to “catch up” and converge with the West as it starts to fully realize the gains from modern technology. The region is also able to avoid many of the intermediate steps that the west had to take on its transformation from agrarian to digital society. Asian countries can move to the latest state of development in a single step.
There is also the fact that many Asian countries have not yet attracted the attention of wealthy western investment funds, despite having sound institutions in place on the ground. Equities in the region are depressed and have much lower P/E ratios than their counterparts in developed markets, upping long-ruin expected returns. They also have policy advantages, particularly with regard to the coronavirus pandemic.
Thanks to frontier markets investment funds, accessing opportunities is improving. Investors and entrepreneurs are now able to put their money into professionally-managed facilities that seek out opportunities based on a series of metrics likely to yield high returns in the future.
Asia may, in fact, provide investors with the long-term returns that they’ve been hoping for since worries entered the market in the aftermath of the Great Recession. A loss of confidence in the West led many to seek non-traditional markets in places like China and Vietnam.
But Central Banks in the UK, Europe, Canada, and the US are doing all they can to flood the markets with liquidity and keep them buoyant. The hope is that this additional stimulus will encourage investors to continue plowing dollars into the market as extra cash helps to bid up asset prices and provide higher returns to existing owners.
Commentators don’t yet know how high returns will get in Asian markets. Growth is not a proxy for equity earnings. However, it could get as high as it did in Sweden in parts of the 20th century, which managed to top out at an impressive 16 percent per annum.
The outcome will depend on the profitability of the legal and social environment. Listed firms may find that they can maintain considerable profits over the long-term with very little difficulty. Or governments may seek to weaken the private sector elite by lowering regulations and enabling more firms to enter the market and whittle away at earnings.
Most investors looking to go East will consult with capital management firms and use on-the-ground expertise to ensure they are making sound investments.