It’s a depressing time we live in right now. Everyday we read about more job losses. More bad news keep on coming from the major economies of US, Europe and Japan, which are all in recession. The doomsayers are predicting this will last for years, that this is the second global depression. Given the general depressed mood of investors, it is no surprise that most of us have decided to simply wait out this period. And this caution extends to consumers and businesses as well.
But this is counter productive in the sense that if every investor sells out of everything, all consumer stops buying, and every business stops hiring and keeps firing, then our economy will truly grind to a halt. The US consumer has always been the one that keeps on spending and keeping Asia’s export levels up. Now even the mighty US consumer has fallen, and Asia is hurting.
The financial crisis which has frozen much of the lending will keep the US consumer cautious for a long time. The US consumer has overspent and is sitting on far too much debt. As at September 2008, the US household debt to disposable income ratio stood at 1.3 times (source: US Bureau of Economic Analysis and Federal Reserve). This means that for every dollar of disposable income, an average US citizen has to pay off US$ 1.30 worth of debt! Given the current credit squeeze experienced globally, it will be a long time before the US consumer pays down enough of his debt to start spending aggressively again.
This means that the Asian consumers have to now step up. Here in Asia, where lending practices have been far more prudent, and where people generally save a much higher proportion of their income compared to the West, we are in a far stronger position to spend than the US consumer.
In the years to come, Asian businesses that are in a strong financial position will gradually expand their operations. They will take advantage of these times when their western competitors are reeling from huge debts to move ahead. This will see a gradual shift in power towards Asia. Before, Asia was primarily seen to be a low cost manufacturing and service base for the world, but increasingly, its consumer market will come to the forefront as well.
Gone are the days where the investment banks use leverage to play roulette with money which is financed on credit. The finance industry in the US will be heavily regulated going forward and regulators around the world will also scrutinise their banks more closely. This also means that we will move towards actual real profits generated by companies who are selling tangible goods and services, instead of just moving money around. In Asia, where lending practices have been much more strict, and where the focus has still been on producing goods and services will increasingly come to the fore in such a new world.
No matter how tough things are now or in the near future, we need to believe in the tenacity of the human spirit. We seek to thrive despite all the difficulties around us. And people will always need to eat, to travel, and engage in leisure activities. Hence, many of the consumer staples industries will always be around. Similarly, there will always be a need for banking services. The person on the street still needs banking services for everything from car loans to housing loans, credit cards, investment and savings. This is why the finance industry isn’t going to simply collapse just because some big banks got nationalised. The players in it may change, the weaker ones will lose prominence even as others stronger ones gain during this time, but since the need for the finance industry remains, it will emerge from this crisis.
This is why despite the doom and gloom, especially within the finance industry, I am confident that the global finance industry will eventually emerge from the current mess, though perhaps with markedly different players. It is interesting to note that by market capitalisation, some of the Asian banks are now already the largest in the world, superseding the likes of Morgan Stanley, Citibank and Bank of America. The Industrial & Commercial Bank of China has a market capitalization of USD 183 billion while HSBC, one of the largest bank in Hong Kong has a market capitalization of USD 96 billion. This compares with Morgan Stanley at USD 22.4 billion, Citigroup at USD18.2 billion and Bank of America at USD 35.3 billion in market capitalization. (All figures taken as at 11 February 2009).
While the Americans seems to be placing too much hope on large stimulus packages to save the day, the Asians, whom have learnt to never expect too much help from the governments, will be the ones that bounce back the fastest from the current situation. Think back to the 1997 Asian Financial Crisis, where we had a similar credit squeeze situation in Asia. We didn’t even have the big stimulus packages then that many Asian governments are implementing now and yet, by and large, the Asian finance industry had recovered by late 1999.
While bailouts, handouts and large stimulus packages seem to be the order of the day, we need to be careful not to breed a mentality of dependency here in Asia. Asia has always been able to recover and bounce back precisely because its companies were forced to be competitive (its main export markets were in the US, not here in Asia), and its people had to rely on their own instead of on handouts.
Take the US auto industry as an example of dependency. Spending billions of dollars to keep uncompetitive US auto companies afloat is throwing good money away. We bemoan the high pay given to Wall Street bankers. But aren’t the US auto companies also hiring too much staff and paying them overly high salaries? Otherwise, why can’t it compete with the far more efficient Japanese automakers, which are hiring the same US citizens to run its auto factories? Bailouts will only serve to keep large, inefficient companies around simply because they are “too large to fail” and prevent smaller, healthier, but more competitive companies from rising to the fore.
In conclusion, the massive losses in the US banking industry and the current global credit squeeze will see huge changes going ahead. The rate at which economic power has been shifting towards Asia will increase. Especially since Asian markets are going to become more and more important, being the main growth markets remaining as opposed to the spent US consumer market. As a result of this, Asian currencies will continue a long term trend of strengthening against the US dollar, and Asian companies will increase in prominence relative to the US companies. While we still need some sort of recovery from the US, the road to recovery for the US is going to be a slow and painful one. On the other hand, when the recovery in Asia does arrive, Asia will be charging ahead.