US and UK quantitative easing, and low interest rates in most parts of the world, are pushing up asset and commodity prices. It looks as if the downturns will be less severe in the countries which expand their money supply fastest and borrow more. The problem is, that one day they have to start controlling money growth again, and they have to start paying back all the debt.
Both the US and the UK authorities are reluctant to tell us when they will stop their bond buying programmes. On both sides of the Atlantic government bond yields have risen and prices fallen despite the large government buying programmes. The Fed Chairman has started to talk about the need to curb the large public sector deficit. The Bank of England is more muted in its comments, and seems more preoccupied with output and activity than with anything else.
We see this period of asset inflation or recovery from the lows on March as a temporary phase for the West. The deep seated imbalances remain to be corrected. The longer-term growth rates of the heavily borrowed countries must be impaired. There will no longer be the same turbo charger on growth from private sector credit creation, whilst sometime governments will need to rein in to start to correct their huge deficits.
So far this year Asian markets have done better than the advanced country Stock Exchanges. We expect this pattern to continue, as more Western investors come to realise that there is more growth in the East, and come to see that their own representation in these markets is still very small. India has done especially well recently, reflecting the election outcome and the continuing strength of the economy. There is some need for the authorities to tighten policy a bit, which might induce some more caution by investors.
Many funds in the UK still have well under 10% in Asia and emerging markets, with far larger positions in UK and US equities. Given the different outlooks, we think there is a case for having more in Asian and Emerging market equity than in the US and UK combined. In the 1960s and early 1970s many western investors had small positions in Japan, although it seemed obvious they were going to outgrow the West. Western investors only expanded their positions in Japan late in the day, in time for the bubble to burst in 1990. It would be a pity if western funds do the same with China, India and the other Asian tigers in this decade.