Western investors weigh in on Asian markets

Several private equity executives speaking at the Milken Institute Conference in LA provided a candid Western perspective on Asian markets and the issues surrounding investment.

China’s slower GDP growth is still impressive and as it shifts to a domestic-consumption led economy, opportunities in the consumer sector are most attractive, according to panelists speaking about emerging markets at the Milken Institute Global Conference 2013 in Los Angeles.

“There are those who worry about China and those who don’t. I don’t,” said Sara Zervos senior portfolio manager and head of global debt at OFI Global Asset Management. “Growing at 7 percent, China still delivers a heck of a lot of GDP to the world. Two years ago when it was growing at 10 percent we were worried about a hard landing.”

China is undergoing a shift to a domestic consumption-led economy and the potential opportunity is barely tapped, added Chris Hoong, managing director, Far East Consortium International, which invests in real estate connected to China’s outbound tourism. 

[China is] a great example [that shows] GDP growth does not equate to return on equity. We have to resist that notion in allocating capital

Jonathan Nelson
founder and CEO
Providence Equity Partners

Not all citizens in China are permitted to travel overseas, he said. “Imagine serving 300 million customers, where we are experiencing high growth, but there is still a one billion population of untapped demand.”

In contrast, Jonathan Nelson, founder and CEO of Providence Equity Partners, which has a China office, said his firm has been very cautious on investing in China. 

Speaking on a separate panel on private equity, he said that while the macro growth and the huge middle class are beneficial, “a set of micro issues which don’t show up in any national numbers” increase risk. “It has to do with exits, governance, law, tax policy, a range of issues that get in between an investment and our exit… Those engaged in that part of the world could tell you stories that would terrify you.”

“It’s a great example [that shows] GDP growth does not equate to return on equity. We have to resist that notion in allocating capital.”

John Coombe, executive director, JANA Investment Advisers, expressed his disappointment with India in the context of emerging markets. 

“They’ve got this unbelievable belief that they’ve got this demographic right to prosperity and I just don’t see it,” he said. 

“[India] has such structural issues in terms of power [generation], it has no manufacturing industry, I don’t understand why they think because they educate their children and they’ve got a young population…why they’re going to be prosperous 10-15 years down the track. I hope they’re right, but you don’t get out of poverty only because you’ve got a lot of young people.”

In contrast to India, Coombe was bullish on Indonesia, which has a large young consumer population and a “much better government than before. The trouble is, the infrastructure is poor”. 

Japan is one of the most challenging places on the globe. It has no culture of personal responsibility, corporate responsibility. Guys get indicted and run the company from jail

David Bonderman
founding partner
TPG Capital

Jay Pelosky, principal, J2Z Advisory, added that the emerging markets’ export-led growth model is broken and the model to replace it, the domestic-demand led model, “suggests a complete flip in reorientation of currency strategy” globally.

Emerging markets traditionally focused on weak currencies to support export-led growth and the developed markets maintained a strong currency to dampen inflation, he said. 

“That is completely flipped. Emerging markets [now] want strong currencies to foster domestic-led growth and the developed markets want weak currencies to foster demand.”

In Asia, Pelosky singled out Japan as a developed market that will benefit in the shift to a weaker currency.

On the topic of Japan, David Bonderman, founding partner of TPG Capital, had some harsh words. Speaking on the private equity panel, he said “Japan is only place in the world where there’s less competition today than there was 10 years ago. Lots of [firms] packed up and went home…”

“Japan is one of the most challenging places on the globe,” Bonderman continued. “It has no culture of personal responsibility, corporate responsibility. Guys get indicted and run the company from jail. The demographic is terrible. They’re xenophobic so they don’t encourage people to come in. So over time I hate the place.”