You’ve been warned about the next bubble. (Don’t panic yet. It looks like it’s a way off.)
A recent survey of 109 institutional investors based in Asia and Europe, commissioned by Fidelity from the Economist Intelligence Unit, shows that 63% of respondents plan to increase their allocation to stocks in Asia (excluding Australia and Japan) in 2010 even though 1) they think Asian assets are riskier than their counterparts in developed markets, and 2) they admit that they lack knowledge and expertise in these markets.
In other words they’re jumping on the band wagon. (I doubt that the survey would find very different results for U.S. institutional investors. Fidelity itself, for example, is moving one of its stars Anthony Bolton to Hong Kong this month to set up a $971 million China investment trust that will be listed in London.)
I think we all know the effects of this enthusiasm: more money comes in, prices and (multiples) go higher, and so more money comes in, pushing prices higher. At some point prices lose all connection with the real value of the assets (a house is a house and not a poker chip.) The bubble continues to inflate until some event pricks it.
The problem is that if this is as bubble in the making, what do you do about it?
It’s too early to shun Asian markets. Valuations are still reasonable. And there’s lots of money to be made in the early stages of what may turn out to be a bubble down the road.
But at some point valuations won’t be reasonable. In fact investors will use increasingly tortured logic to defend them.
That’s the point to move to the sidelines.
We’ll see if we’re any better at telling when to move to the sidelines than we were in the last two bubbles.
And then, of course, there’s the very real possibility that Asian markets won’t get to the full-fledged bubble stage because China will make a mistake with economic or monetary policy as it tries to keep growing at near 10% a year without setting off inflation. A mistake in China before the bubble is fully inflated would produce the kind of big correction that dampens enthusiasm about any market.
And sends institutional investors plans into reverse.
A correction wouldn’t be pleasant but it sure would beat living through another burst investment bubble.
Asia should be getting a boost especially if the big US engine kicks back up….
One of the most positive signs for the region is the US dollar strengthening. This is huge because countries don’t need to try to weaken currencies to keep up with China
I keep reading that China is over built in its infrstructure, that is swamped with bad loans, , that there is increasing wage pressure from lesser nations…that will slow China’s growth.
That the entire planet plans to export their way out of depression..
And the big money boys are diving into China !
I obviously know nothing about investing !
I mean that !
I obviously know nothing about investing !
DJB, I saw the article about the Rio Tinto executives earlier today and immediately wondered what the real truth is. Governments like China’s are not known for respecting human rights and I always suspect confessions. At the same time large companies have a long history of bribing corrupt officials in equally corrupt countries. Add to that the positioning that both China and iron ore companies have been taking as regards to price increases and who will ultimately control the access to remaining natural resources. With all this going on I have my suspicions about any confessions being the real truth or the last word on the subject.
Rio’s Hu Pleads Guilty to Bribery Charge, Lawyer Says (Update4)
http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=RIO%3AAU&sid=aGvoHTl1EmoU
Jim,
Based upon your blog, would a way to temper the risk factor in China and the future bubble risk in Asia and still benefit from the region by using a fund like MAPIX. It does charge a fee but has a dividend, 4.3%