Asia's Tech Pioneers - Matthew Miau and the MiTAC-Synnex Group

In my research and investing I stress three things: people, structure, and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap. 

This post is about people, namely Matthew Miau and the Miau family. It’s due to his pioneering and entrepreneurial efforts that Taiwan has become one of the world’s leading producers of high-technology products.

Surprisingly there’s very little written in English about the Miau family. In fact my introduction to him was through an investment in Istanbul listed Arena Bilgisayar Sanayi ve Ticaret SA (Arena). Arena is a subsidiary of Mumbai listed Redington India Ltd, whose largest shareholder is Taiwan listed Synnex Technology International Corp. All three are among the largest IT distributors in their respective regions.

US consumers and investors may have heard of their North American operation, Synnex Corporation, the third largest tech products distributor in North America as well as the second largest “CX’, or ‘customer experience’ company. It’s ranked 130 on the Fortune 500 list with sales of over USD23b in 2019 (see here). Synnex Coropration’s shares have been traded in the US since 2003.

While there’s not much written in English about them, the Miau family is well known in Taiwan. Group head Matthew Miau kindly wrote two autobiographies and there’s at least one other book on him and the group. Matthew’s father, and the clan’s patriarch, Miau Yu-Siou, was known in Taiwan as the ‘Flour King’. 

My Chinese is pretty bad so the very capable Cindy Wan (萬庭瑋) did the heavy lifting reading three books on the group. She also helped map their holdings and did extra work on the history of this very interesting business group and family. 

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Before TSMC^[1]  This article is the combination of Cindy’s research on Synnex-MiTAC group and the review of the three books she read about the group: Win-win Strategy— The Story of Miau Feng-Chiang’s Strategic Alliances^[2] (雙贏策略—苗豐強策略聯盟的故事), Chess Game Win-Win— Miau, Feng-Chiang’s Global Strategy (棋局雙贏—苗豐強的全球化策略) and MiTAC Inc—The Story of a Pioneer in Taiwan's Computer Industry (大顯神通—台灣電腦業開路先鋒的故事).  Yours truly added some additional insight and is responsible for any mistakes or inaccuracies herein. 

The books’ main focus is the origin and early development of Synnex-MiTAC Group, a Taiwan-based conglomerate, which represents the interests of the Miau Family. Gradually transforming into a technology-centric, albeit diversified group, the family’s initial company was a wheat milling and flour processing business. It was not until Matthew Miau started a business in the technology industry that the group expanded into technology. It is now one of the world’s largest distributors of technology products.

From Shandong flour to Silicon Valley high tech The group could just as easily be referred to as the Lien Hwa group. Lien Hwa was established by Matthew Miau’s father Miau Yu-Siou (苗育秀). Born in 1919 in Shandong^[3] he was involved in the flour and barley processing industry in Qingdao and Yantai before joining the 1949 KMT retreat from the Mainland at the end of China’s civil war. He founded Lien Hwa to mill flour and rice in 1951. It grew into one of Taiwan’s largest flour mills and today has a market share of over 20%. Yu-Siou actively promoted flour as a substitute carbohydrate to rice in Taiwan. By the time of his passing in 2004 he was locally known as, “The Father of Flour”, or “Flour King”. He was one of the prominent entrepreneurs in Taiwan’s early business circles and appears to have had a good relationship with the government which was extremely important during Taiwan’s long period under martial law (1949 to 1987)^[4].

Not all rich kids are playboys His father’s thriving flour business meant that Mathew Miau was born in a well-to-do family. This meant that he could study abroad – a luxury now but even more so in 1960's Taiwan. He went to high school in Hong Kong and later the University of California at Berkeley, where he graduated with a bachelor degree in electrical engineering. One of his first jobs was at Intel, which in 1971 was a small start up where he rubbed shoulders with tech legends such as Andy Grove and Gordon Moore. He later got an MBA from Santa Clara University.

Family calling Matthew moved back to Taiwan in 1976 to work for Union Petrochemical Corporation (UPC), in which family company Lien Hwa was a large investor.

Before leaving the US he asked for exclusive distribution rights for Intel microprocessors in Taiwan. However, these had already been awarded to MiTAC Inc, a start-up Taiwanese company founded by Hou Qing-Xiong (侯清雄) and Lee Chen-Ying (李振瀛), electrical engineering classmates at the island’s top university, National Taiwan University. The two had invested NTD50 thousand respectively and got another NTD1.9 million from a family friend of Hou Qing-Xiang who owned an animal feed milling plant.

Originally established to distribute computers and perform systems integration work, MiTAC started to sell Intel’s microprocessors in Taiwan in 1975. At the time it was just a tiny team with about 12 employees and a total capital of NTD2 million, struggling to survive in an era when few people knew about computers, let alone microprocessors.

Sensing a good opportunity, Matthew sold his Intel shares and along with family money, invested USD150,000 in the struggling MiTAC. He became its largest investor, assumed the role of Chairman and oversaw management and financial planning. Matthew came with a lot of skills and experience. He had cutting edge technical knowledge and hands-on experience and relationships from his days at Intel. He also had an international background and outlook and, through family connections, a good relationship with Taiwan government officials. The MiTAC founders specialized in senior roles. Hou Qing-Xiong was responsible for business development, human resources and training. Lee Chen-Ying, was in charge of marketing and sales.

Taiwan's pioneering tech company MiTAC is likely the very first computer company in Taiwan – or at least one of the few that survived and is still around to claim bragging rights to being the first. 

Like other startups, MiTAC did many things in its early days. It developed chips for various products such as washing machines, air conditioners and chemical factories. The company collaborated with Taiwan’s highway department to automate traffic systems and build highway display boards. It also made electronic systems for Taiwan’s growing agricultural industry. This included automating pig auctions and grain inventory. MiTAC computerized local consumer goods giant Uni-President’s payroll process and invented the world’s first Chinese computer interface, which was used by Taiwan’s tax, police and other government departments.

MiTAC continued to expand in the 1970s and 1980s before settling into three main business lines more-or-less organized into three companies. Systems Integration remained under MiTAC, computer manufacturing under MiTAC International and technology distribution under Synnex. 

Overcoming hardship The group didn't always have a smooth path. As Taiwan’s tech industry grew it lost several early managers and employees to a talent shortage which occurred in the early 1980s. Foreign technology companies poached some of MiTAC’s best employees. It was a great loss for the company at that time.

One way to overcome the talent shortage was to recruit outside managers, which the group started to do in the mid-1980s. But things didn’t work out as they expected. According to the book, 大顯神通—台灣電腦業開路先鋒的故事 (MiTAC Inc--The Story Of A Pioneer in Taiwan's Computer Industry), the new managers had little understanding of both the group’s culture and the personal computer market in Taiwan. They were also not ready to be the hands-on, roll-up-their-sleeves guys to get things done like Matthew Miau and the older managers. The incident led Matthew Miau to place more emphasis on keeping and promoting from within rather than recruiting from outside.

Another crisis the group encountered also occurred in the 1980s. It was the era when the video gaming industry was booming in Taiwan. One of MiTAC Inc’s subsidiaries, Synnex Technology International, a distributor of electronic components, was selling many of its products to electronic game manufacturers. Reports of teenage addiction and their use in gambling led to harsh criticism of the games, and they were banned in the early 1980's. As a result, many of their customers went out of business and Synnex's debt load skyrocketed. Fortunately, MiTAC Inc had already built a strong foundation and was able to help its subsidiary survive the crisis.

Structure The Synnex group has a large number of corporate entities. We counted over 400 companies, subsidiaries and associates in MiTAC-Synnex related firms.

In Taiwan the three main companies are Lien Hwa Holding, MiTAC Holding, and Synnex Tech International. The group’s original company, Lien Hwa Holding still mills flour and also oversees most of the group’s non-tech related businesses including petrochemicals and specialized industrial gases. But like virtually all companies in the group, it also has some tech businesses, which in Lien Hwa’s case includes its domestic system integration business. MiTAC Holding mostly holds the group’s manufacturing businesses including computers, fasteners, magnesium alloy and other technology products. Synnex Tech International is its holding company for the group’s vast electronic components distribution business. It has subsidiaries in India, the Middle East, Turkey and South-East Asia. 

Outside of Taiwan the group’s key asset is it’s 10.2% stake in Synnex Corporation, which is its largest company by market capitalisation and revenue. At the end of June 2020 it’s USD5.8b accounted for 43.3% of the group’s total market capitalisation^[5], and its USD24b in revenue last year made it the 130^th largest company on the Fortune 500 list of the largest companies in the United States (see here). Synnex Corporation has two key businesses which, as this is being written, are due to be separated. Its electronics distribution business covers the parts of the world that its Taiwan-listed subsidiary does not: the Americas, Europe, Japan and South Korea. Its customer experience / digital services business is under Concentrix. 

Complex in Taiwan. Simple outside Although not highlighted in the books Cindy read, she found that Synnex’s Taiwan entities appear to have a complex holding structure, particularly in the ownership and cross shareholdings of its eight Taiwan listed entities (see ownership structure below). 

There are also many instances where we were unable to determine ultimate control of certain companies. The paper trail from our cursory research effort went dead. There is also substantial overlap among group companies with several engaged in the same business, albeit in different locations.

This contrasts with the relatively straightforward structure of its overseas subsidiaries and associates. As seen below, Synnex invested Redington's corporate structure is relatively straight forward (from their website. See here).

Mr. JV. Taiwan’s local press many times refers to Matthew Miau as “Mr. Joint-Venture”, or “JV King” as many companies were acquired or started as JV’s. He believed that multinational strategic alliances embodied his idea of “make full use of limited resources and do unlimited business.”^[6] For example, Synnex Tech International was established as a joint venture in 1988 between MiTAC group and Lex Services, a UK company that began life as an automobile factory, eventually becoming one of the largest distributors of electronic components and computer systems in Europe. The predecessor of Linde LienHwa, BOC Lien Hwa Industrial Co., Ltd., was founded in 1985 as a joint venture between Lien Hwa Industrial Corporation and UK's BOC Group Plc., one of the world’s largest industrial gas suppliers. GeTac Technology Corporation was established as a joint-venture between the group and GE Aerospace (50%-50%).

This pattern continues into the 2000's. Between 2001 and 2018, the US-listed Synnex Corporation made 23 acquisitions of companies outside of the group. 

 

Book Recommendation

According to Cindy, the two books written by Matthew Miau are fairly similar. They illustrate how Mathew Miao led the conglomerate to grow from a scrappy, local personal computer manufacturer and software developer, to a global electronic component distribution and technology powerhouse.

Despite being written 17 and 22 years ago, the two autobiographies provide lots of details that are germane to the group’s history. They also give a personal viewpoint of the inception and growth of Taiwan’s very successful and world-leading technology industry. Taiwan and its nascent technology industry were very different in the 1970's and 1980''s when there was no Internet or smartphones. 

His autobiographies also allow readers to have a better understanding of how Mr. Miao guided the group’s growth. Like other autobiographies, it’s more than likely biased toward the positives. However, Cindy feels they are still worth reading to get a better idea of how the companies within the group evolved.

The third book, MiTAC Inc--The Story of a Pioneer in Taiwan's Computer Industry, (大顯神通—台灣電腦業開路先鋒的故事), was written by Tan Zhong-Min (譚仲民) in 1995. Mr. Tan was a Commercial Times^[7] reporter who focused on the information technology industry. Cindy thinks it makes a good complement to Mr. Miau’s two autobiographies. She believes it’s more objective and unveils the story of several important founding members of Synnex in addition to Mr. Miau. 

Some of them are still key people within the group, such as Su Liang (蘇亮), Du Shu-Wu (杜書伍) and Francis Tsai Feng-Tsu (蔡豐賜), who all graduated at the same time from Chaio Tung University's computer engineering class. Su Liang was especially good at programming in the early days and currently holds several senior positions in group companies including the Chairmanship of MITAC Information Technology Group. Du Shu-Wu mainly took charge of the electronic component’s distribution segment. He’s now the President of Synnex Technology International Corporation, and holds other board and senior positions in group companies. Francis Tsai was in charge of the operation of MiTAC International and now holds several senior titles in the group including Chairman of Waffer Technology Corp.

Of the three books Cindy prefers the later autobiography and the more objective group history by Mr. Tan, the Commercial Times reporter. She thinks together they provide thorough insight into the conglomerate from both an inside and outside point of view.

Many thanks to Mr. Miau for sharing his life story and also to Mr. Tan for writing about the group. Most of all thanks to Cindy Wan for her thorough research and insight into a surprisingly complicated corporate structure.

Book List:

     Win-win Strategy— The Story of Miau, Feng-Chiang’s Strategic Alliances (雙贏策略—苗豐強策略聯盟的故事), by Matthew Miau, published by Commonwealth Publishing Co. Ltd in 1997

-   Chess Game Win-Win— Miau, Feng-Chiang’s Global Strategy (棋局雙贏—苗豐強的全球化策略), by Matthew Miau, published by Commonwealth Publishing Co. Ltd in 2002.

-    MiTAC Inc--The Story of a Pioneer in Taiwan's Computer Industry (大顯神通—台灣電腦業開路先鋒的故事), Tan Zhong-Min (譚仲民), published by Business Weekly in 1995.

 

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^[1] TSMC is short for Taiwan Semiconductor Manufacturing Company. Listed in Taiwan with ADRs traded in the United States, it is one of the largest companies in Taiwan and one of the world’s largest manufacturers of integrated circuits and semiconductors. It was founded in 1987 by another technology pioneer, Morris Chang Chung Mou (張忠謀). Its importance and size is underscored by its almost 24% weighting in the largest Taiwan ETF (EWT, iShares MSCI Taiwan Index). This is more than four times larger than its next largest constituent (Hon Hai Precision Industry, 5.2%).

^[2] Only Chinese editions of all these books are available. English translation of the titles by Cindy Wan.

^[3] An interesting side note in early Taiwan business circles, is the ‘Shandong Gang’. The gang bundles together several leading Shandong-born businessmen. In addition to Miao Yu-Siou, other people commonly grouped in this ‘gang’ include the chairman of Ruentex Group, Samuel Yin Yen-Liang (尹衍樑)’s father, Yin Shu-Tian(尹書田), the founder of Liu Huo (六和) textile group, Zong Ren-Qing (宗仁卿), the founder of DaChan (大成) group, Han Hao-Ran (韓浩然) and the founder of Baolong (寶隆) International Corp, Zhao Chang-Shu (趙常恕).

^[4] Taiwan’s 38 years under martial law was one of the longest in modern history. According to a Wikipedia entry only Syria’s was longer at 44 years (1967-2011). (see here)

^[5] Market capitalization values a company based on the current price of its stock. It is a company’s total number of outstanding shares multiplied by the current share price. It’s usually what comprises the biggest component of rich individuals’ net worth.

^[6] MiTAC Inc—The Story of a Pioneer in Taiwan's Computer Industry (大顯神通—台灣電腦業開路先鋒的故事),It is also appears on MiTAC Synnex Group’s website (see here)

^[7] Commercial Times one of Taiwan’s leading business media companies (see here)

Why Equities Outperform

A week-long summer reunion got me thinking once again about how to best explain what I do to my more academically-inclined family.  “It sounds like you’re trying to figure out what will go up and what will go down. Don’t you get bored with that?” is the way my very wise mother summed up my profession/obsession with stocks.

Ultimately my goal is to help people invest wisely which means I first have to convince others that equities make sense.  A good place to start with is my skeptical family.

Like many, one of their biggest direct investments was a second property.  It did not work out well from what I remember.  

Property is often seen as a safer investment than stocks.  But is it a better investment? 

My example takes this post back to Asia - my home and center of attention for most of the last thirty years.

In the last 15 years property in Taiwan has been a very good investment with prices rising almost three times, according to one of the most followed property indexes in Taiwan, the Sinyi Taiwan Housing Price Index (link here).

The index is provided by Sinyi Reality Inc., one of Taiwan’s largest real estate brokers with an estimated 7.7% market share as of June 2015. [1] Sinyi was founded in 1987 and listed via IPO in Taiwan in 2001.

Since March 2001 Sinyi’s price has increased by 1209%.  It was a volatile ride as seen in the chart below, but investing in a company that provides real estate services was a better investment than real property [2].

Put another way, if one bought NTD1m (USD28,500) worth of Sinyi shares in March 2001 and held until end-June 2015, these would be worth NTD13.1m (USD424,000).  The equity investor turned NTD1m into NTD13.1m.  In contrast the average investor in physical property turned NTD1m into NTD2.9m.  The long term buy-and-hold investor in Sinyi’s equity made more than 4 times what the average property investor made.

Investing in bricks and mortar is fine, but trails the innovation, hard work, and intelligence of the 4,085 people that Sinyi employed at the end of 2014. [3]

However the return from the market overall was not so good.  Over the same period the Taiex, the main index followed in Taiwan, rose by only 69%.  Stock selection matters as I've written about before (see here).

Not Just Taiwan

Robert Shiller, a famous US economist and one of the few who warned that US property was expensive before the 2008 bubble burst, was also one of the first to compile long-term data on housing prices. 

He found that real housing prices in the US – i.e. after the effects of inflation –rose by 66% between 1890 and 2004, or a mere 0.4% per annum. [4]

I couldn’t find a direct comparison, however between 1900 and 2014 the real return from equities was 6.5% annualized. [5]

This includes reinvested dividends so the comparison is not apples-to-apples. Assuming dividends and their growth account for half that gain, the long-term return from US equities is almost 5 times more than that of US property.

People Power

Equities represent shares of a business.  When buying and selling stocks you're buying and selling a small part of that business.  Saying that equities are a better investment than property is another way of saying that investing in people is better than investing in land and the inanimate block of concrete, wood, and other building materials that sits on it.

And what are businesses?  Fundamentally they are a collection of people and things that do something to help other people.  Those other people buy the stuff or service that these companies make.  If the business is adding value it makes a profit.  If more people want to buy that stuff in the future the business will grow.  

Notice how often the word ‘people’ appears in the previous paragraph.  What I like about businesses – and why I believe equities outperform other asset classes – is that business is all about people.  And we humans are wonderfully complex, imaginative and progressive creatures. 

The stuff we do simply amazes me.  The diver that scores the perfect 10s. The invention of the Internet and integrated chips. The discovery of a new medicine that cures a disease that was once considered unbeatable. 

Think of how we live more interesting and efficient lives because of Apple’s innovations.  Think of how many people in the world have one or several integrated circuits in their cars, handbags and pockets that were made at TSMC or UMC's plants.  Think of the savings in time and convenience because of the MTR Corp.’s trains.  None of these companies were around when I was born.  They are now part of millions of people’s daily lives and are all multi-billion dollar companies.

It is totally big picture, but investing in companies is like investing in man/womankind’s incredible ability to innovate. Human beings are amazing and many listed companies are big and famous now because they provide a superior product or service. 

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[1] Prices have risen so fast that, according to the Global Property Guide, property in Taipei has some of world’s lowest rental yields. It is also one of the world’s least affordable places to buy with a price to income ratio of 8.4x, more than double than Japan which has a price to income ratio of 4x.  In short, Taiwan’s property rise may still have a way to go, but after such a good run, large future price increases are unlikely. 

[2] Note that we’ve left out stock dividends and property rentals from our calculations

[3] As per Sinyi Realty Inc annual report

[4] Irrational Exuberance; 2^nd Edition, Robert Shiller

[5] Credit Suisse Global Investment Returns Yearbook 2015

It's A Chaotic World. Profit From It

In my research and investing I stress three things: people, structure and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below intrinsic levels if not outright cheap.

This post is mostly about people.  More specifically it is about investors and their desire for steady returns.  While I can understand the desire for predictability, it runs against my experience and philosophy.

Stability definitely has its place.  A stable political system, marriage and friendships are extremely good things.  And I’m about as far from an anarchist as possible.

But I feel differently about business and investments.  In fact I get scared when things are too stable and predictable.  The world is wonderfully chaotic and investors should embrace this rather than spending a lot of time, energy and money trying to smooth returns.  “Entropy is the only constant” is my favorite graffiti.  Closer to home friends say "變幻才是永恆"; "there is nothing permanent except change".  

Let me explain.

In the last few months I've been talking to people about my investment process and how I can help manage their funds.  It’s been going slow.  Most of the world is looking for steady, safe and predictable returns.  Asia’s moneyed class are looking for steady returns of 5-6% according to feedback from several in the financial community.

European investors must be even more scared.  Many are not only forgoing positive returns, but are paying governments for the privilege of holding their money.  Hence the negative government bond yields in many European countries. 

In contrast my investment strategy and process - which looks for out-of-favor quality companies in beaten down markets - are dependent on continued volatility.  Great bargains rarely appear in steady markets.  Great returns are also rare in steady markets. 

Be Afraid of Stability

Twenty-five years ago as a young analyst I loved analyzing companies that had steadily increasing sales, constant profit margins and growing profits. This made my financial projections easy. 

However experience has taught me not to trust steady returns and stability.  The business world is competitive and anything but stable.  I now believe that ‘stable’, ‘no risk’, and ‘guaranteed return’ are some of the most frightening words in business and investment.  

Consider the following:

• Bernie Madoff’s funds got big by seemingly delivering steady monthly returns in both up and down markets.   As we know now, it was all a fraud.
• Before it went bankrupt, Enron was well-liked by sell-side analysts and investors for meeting analyst estimates.  It steadily met expectations and was considered a stable and safe company.  But it was mostly smoke and mirrors before it became America’s largest bankruptcy. 
• The desire for, and fallacy of, steady growth is nothing new.  Adam Smith (aka George Goodman) wrote about the illusion of steady growth in his 1972 book SuperMoney. "Everywhere you looked, there was a company with a neat stepladder of growing earnings.  Some kept the stepladder right up to the day they filed for bankruptcy" (my review of the book is here).
• In his commentary on Dell being fined by the SEC for fraudulent accounting designed to smooth earnings, author and Darden School of Business professor Edward Hess notes that, "companies that grow for more than four consecutive years without resorting to earnings games are the exception, not the rule” (source document is here).

Growth and investments by definition are dependent on the future.  No one can predict the future so there is simply no way to fully guarantee their success or return.  Not every corporate expansion project works just as not every investment works (ask me about Ukraine. Link here).

At the end of the day, the world is not a stable or predictable place. And we don’t want it that way:

• If the world was stable over the last 100 years most of us would be plowing fields and playing cards instead of working in temperature-controlled offices and surfing 100 cable channels.
• Who would have predicted that a college dropout, hippy wannabe and a disheveled electronics geek would create Apple which changes the way we communicate, access information, and take pictures?
• I’m sure Kodak and many other companies would have preferred the stability of the pre-digital world.  Investors who embraced change did well, those that stuck with the old did not
• The biggest advertisement for positive effects of change is China.  Virtually the entire country has transformed in the last 30 years. Subsistence agriculture to export manufacturing to domestic consumption. Rural to urban migration. Collective agriculture to private property.  Etc, etc.

The world is wonderfully chaotic.  Live with it.  Embrace it.  Profit from it.

Decrease in IPOs is a Good Signal

Closing out the year, IPOs are back in the news.  There were several large IPOs in HK and the US in the last quarter of 2013 and many had good first day price increases.  Some press articles are expecting IPO activity to increase in 2014 with many calling for it to be the best year for IPOs since 2007 (articles here and here).  

A large number of IPOs always seemed like the sign of a market top to me.  But this has been more of an assumption than something based on fact or past performance.

Thanks to accounting firm Ernst and Young and index provider MSCI I was able to assemble the chart below.  It shows IPO capital raised and overall global equity performance as tracked by the MSCI All Country World Index (ACWI) for the past 11+ years.  Not a large sample at all, but better than nothing.

Bear in mind that these are quick and dirty numbers and not a strict apples-to-apples comparison.  Ernst and Young's IPO figures include several markets that are not included in the AWCI index such as Argentina, Columbia, Syria and Ukraine.  

However all of the large markets are included in both - the US, UK, Japan, China, etc. The US accounts for close to 50% of the MSCI ACWI and it has been the largest issuer of IPO equities in two of the last three years. “It is better to be roughly right than precisely wrong”, John Maynard Keynes is believed to have said.

The quick and dirty comparison shows that in the past eleven years, the global index increased every year after IPO raised capital decreased.  In other words, a good time to invest would have been the year after the amount of money that went into IPOs decreased.  This is highlighted by the red arrows in the chart below.  

However the reverse does not seem to hold.  In the six years that more money went into IPOs, the global index increased in four of those years and decreased in two.  

Thus my initial assumption was wrong.  A large increase in money raised by IPOs does not necessarily mean a market top.  If anything, I suspect that the amount of media attention surrounding new companies coming to the market likely generates more interest in the stock market which helps keep or push up prices and valuations.  

One additional observation.   For the last 12 years, there has mostly been a direct correlation between the direction of IPO capital raised and the direction of the index.  The only years the two were not in sync - at least during this time period - was 2003 and 2012.  In both years IPO funding decreased while the global market index increased.

Bottom-Up Inflation

As mentioned in another post, I think inflation is high and likely higher than the official figures and economists' forecasts.  I recently read a well written report from a noted economist that is sticking to his long-term deflationary forecasts.   

He and others could be correct, but from my standpoint - mostly as a consumer - I see the opposite:  

Inflation is a big worry amongst Mainland Chinese with almost two-thirds citing it as their biggest concern according to a recent FT blog.
1. A friend put some numbers to my inkling that supermarket prices have increased.   After a few weeks away from HK she noticed that a jar of basic yogurt had increased from HK$19 to HK$24, or 26%.  This seems about right.  I've noticed that basic items such as bread, fruit, and vegetables seem to be significantly more expensive in the last several months.
2. The menu at my local Vietnamese restaurant has taped over prices with higher ones.  I've seen this in other restaurants. 
3. Hong Kong taxi fares will increase 7-9% in December 2013 (article is here)
4. Hong Kong's "10 Dollar Store” should now be referred to as the "12 Dollar Store".  Likely anticipating more price changes, the chain was renamed, "Living Plaza", from "Jusco $10 Plaza". (This actually happened a year ago as reported here).   Format of the store is similar to Japan’s 100-yen store.  Virtually everything the store is the same low price.   (A friend's wife - a Japanese speaker - noted that Japan’s 100-yen stores have NOT raised their prices in many years and that they have better quality products).

Forecast deflation may come to be.  Mainland growth is slowing.  HK retail sales appear to be down some 10-20% YOY.  Property prices seem to be softening.  

But from the ground level, I see more evidence of inflation. 

Asia's More Stable. Play the Instability

Asia is more politically stable than ever before. A key reason for this is that virtually all Asian countries have functioning and predictable leadership transitions. Most with stock markets have an increasingly entrenched and open democracy.

In the long run this creates stability.  Democracy can seem like a messy and chaotic process, but as long as the process is adhered to and respected it seems to create long-term stability.  And equity markets like this consistency.

Leadership changes create uncertainty, something markets don't like. They typically trade at lower valuations when investors’ and speculators’ collective unconscious deems that uncertainty has increased.

There have been several studies looking into the link between political change and stock market performance in the West.  If I remember correctly they seem to show that valuations are highest during the third year of a four-year US presidential cycle. 

In the third year, the uncertainties associated with a new administration are no longer uncertain. Management has made their capital allocation decisions based on the new government’s policy initiatives. Investors have incorporated this new information into their strategy. Analysts increase target stock prices as forecasts are extended based on the new perceived stability.

I've also read that a potentially good time to invest is when a candidate from the US Democratic Party is polling high before the election.  The market likely trades down as the Fox News labeled far-left, tree-hugging hippie is perceived as being anti-business and the American Way.  After investors and speculators realize the new guy is not so bad – and is going to keep his banking and business buddies happy - the market eventually rebounds.

Recent history bears this out.  Between the beginning of October 2008 and now (7 weeks before Obama was elected to his first term, and five years later) the S&P500 index rose by 43%.  Between the beginning of October 1992 to the beginning of October 1997  (7 weeks before Clinton was elected to his first term, and five years later) the S&P500 rose by 130%.    During the same time period under George W. Bush the S&P500 fell by 15% (early October 2000 to early October 2005).

Asia

Closer to home, I don’t think many investors are factoring political transitions into their investment process. Or at least I've not seen much written about it.

In my opinion Asia’s political transitions should actually have more influence on large cap equity prices and the headline indexes than in the West. 

The reason for this is that Asian governments control a significant number of the region’s large listed companies.  According to calculations done a few years ago, Malaysia and China have the highest percent of central government controlled companies at about 50% of market cap.  It was about 40% in Thailand, 35% in Singapore, and 30% in Indonesia.

An example of how this works occurred when I was researching a report on China's corporations.  While researching and writing the book, news started to filter out that Xi Jinping and Li Keqiang would be the next leaders in China.  Not long after there was a leadership change at the SOE oil companies and later the state-owned banks. A few analysts wrote that capex plans had been put on hold while waiting for leadership and policy changes.  

Sell-Off

There have been several articles written about what caused the recent sell-off in emerging markets. I wonder how much of this may be due to the uncertainty surrounding upcoming elections.

Eyeballing the table below - which lists countries by the date of the next general election - one gets the sense that the markets that are recently the most volatile, are also the ones where there is an expected leadership change in the next few years.

Amongst the two hardest hit were Indonesia and India. It could just be a coincidence that both are expected to hold elections next year, but I sense some causation. We don’t know who will be governing Indonesia twelve months from now, and India has to hold a general election by May next year. 

Peak-to-trough Indonesia fell by 27% in the 2^nd and 3^rd quarter this year.  Its currency is down some 15% since the beginning of April.  Between the two, USD investors were down some 40% by mid-August. 

The Indian market did not fall much compared to others – down some 14% peak to trough - but its currency is now down some 22% since the beginning of April.  For USD investors this was a 36% decrease in a relatively short time.

Most of the Asian markets that fell the most were also the most expensive.  According to several long-term valuation metrics I track, Indonesia, the Philippines and Thailand were some of the world’s most expensive markets going into the 2nd quarter. They were also at a phase in the election cycle that made them politically more stable than they had been for several years.  Red and yellow shirts have been peaceful in Bangkok; Aquino is proving to be the best leader of the Philippines since Ramos; and for the last 9 years SBY has provided the first real political stability in Indonesia since Suharto’s 1998 resignation.  I suspect his stability helped the markets to increase to the rich valuations they still trade at.

The change in Asia’s political landscape has been very impressive since I first came to Hong Kong as an exchange student in the mid-80s.  Taiwan was still under martial law. PRC politics were shrouded in mystery. Marcos was still in power.  Suharto, Mahathir and Lee were SE Asia’s strongmen. We came to accept that military coups were the normal way leaders were replaced in Thailand.

More impressively the transition to a more open political change came about relatively peacefully.  Compare what is happening in the Middle East to Asia ex-Japan over the last three decades. 

The changes have made each country – and Asia as a whole - more stable.  Increased FDI flows to the regions are a reflection of this. 

I don't see any reason that Asian markets won't react similarly to the market psychology that seems to accompany the US election process.  "People Are People" sang Depeche Mode in their 1984 hit.