We have talked about the potential for asset bubbles forming in the Chinese property market, highlighting that as a key risk to global stock markets. The potential problem appears even more dire, with Asian (and EM) assets the likely beneficiaries of waves of liquidity flowing out of developed markets.
The current situation: while developed economies (most notably the US) are required to keep interest rates low to stimulate their domestic economies, the emerging markets (and Asia in particular) are booming once again. Output is at record-high levels, while consumers on the ground hardly feel the recessionary chill of the Western world.
A quick look around us in Singapore emphasises this: Bustling car showrooms, packed shopping malls, an extremely tight labour market (a JobsDB email I receive daily highlighting jobs in the financial sector is noticeably longer, compared to a year ago). The IPO market is booming once again, with the latest IPO of GIobal Logistic Properties 12 times subscribed, and Mapletree Industrial Trust set to join in the fray. These are all indications that sentiment is turning positive again, with the STI recently climbing to new 2-year highs.
With Asia and Emerging Markets the obvious forerunners in the post-Lehman world, investors in the US are more than happy to borrow at near-zero rates to participate in the tremendous growth opportunities in the emerging market regions. The expected appreciation of Asian currencies is an added bonus, and also the result of strong inflows of capital into the region. Singapore recently tightened monetary policy further, which will add to upward pressure on the SGD against the USD.
As with all asset bubbles, the flight of capital will be swift, and many investors will be left nursing their wounds in the aftermath. Fortunately, stock market valuations still appear fair at the moment, despite the onslaught of new capital inflows from the West into Asia. Several segments of the Asian stock market appear slightly expensive (Indonesian and Indian equities, consumer discretionary stocks in China and India, as well as hospitality/leisure plays in Singapore), but the overall market is generally fairly valued at present. We will maintain our exposure to the stock market within the portfolio, but will be keenly watching out for bubble-like symptoms which we expect to develop at some stage over the next few years.