Politics
The most useful piece of information for the year ahead I came across is a list of elections and leadership changes in 2012. Markets do not like uncertainty and any decrease in uncertainty is generally good for valuations.
Politics will likely dominate news flow this year. We will get a bit of a respite with this summer’s London Olympics, but overall it will be a year of potential political changes. The two biggest are the US presidential and legislative elections in November, and the ongoing changes in China as political jockeying takes place in advance of the official once-every-ten-years-change in China’s top leadership. After this year, it will be another 20 until US and China leadership changes occur within the same year.
China
I personally think (but have not read nor has anybody corroborated this) that one reason China and HK's markets have done so poorly since the 2009 rebound is due to the uncertainty caused by China’s upcoming political transition.
Not only is China’s premier and president going to change in the next 14 months, but seven out of nine members of the Standing Committee of the Chinese Communist Party’s politburo are due to be replaced. The Party’s Standing Committee is the single most powerful political body in China. Its nine members are a subset of, and come from, the +/- 25 member Politiburo.
In China virtually all significant policy and personnel changes are decided behind closed doors, with confirmation primarily a rubber stamp process. 2012 will be an important year for the upper echelons of China's political elite as the winners are quite likely to retain the position for the next five to ten years.
This jockeying for power seems to have affected listed companies. One reason my book on Chinese conglomerates took longer than planned was due to the large number of "C-level" changes at the large conglomerates. So far leadership changes have occured at all three petroleum groups (CNPC, Sinopec and CNOOC), several of the state-owned banks, and China Life. Together the companies associated with these large conglomerates have a market capitalization of US$1.2trn, and 31% of the HSI.
I’m not sure if there will be more C-level musical chairs going forward, but I suspect that like other investors, those in China do not like uncertainty and valuations may stay repressed until things become clearer on the political front.
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Expanding Democracy
What is very impressive from the list below is the number of orderly transitions we now have in Asia. Taiwan and Korea's democracy are increasingly entrenched. Modern China is looking at an orderly transition of power and what appears to be the second of a 5/10-year transition schedule. Thailand's 2011 election came and went, as did the Philippines. Singapore appears to becoming more responsive to calls for the ruling PAP to loosen its grip. Even Myanmar is expected to hold free elections and allow Aung San Suu Kyi run this year. In short, orderly democratic political change is increasingly entrenched in more Asian countries than ever before.
This is a large improvement from the 1980s and 90s when there was little precedent for peaceful transitions of power in Mainland China, real democracy in Taiwan and Korea was just emerging, and long standing strong-men dominated Singapore (Lee Kwan Yew), Malaysia (Mahathir Mohamad), and Indonesia (Suharto).
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Asian and other significant elections and scheduled political transitions in 2012
- 14 Jan - Taiwan presidential and legislative elections
- 29 Jan - Egyptian legislative elections - stage one
- 19 Feb - Greek legislative election
- 2 Mar - Iranian legislative election
- 4 Mar - Russian presidential election
- 1 Apr - Myanmar by-elections
- Apr - South Korean parliamentary elections (tentative/snap)
- 22 Apr - first round of French presidential election
- 6 May - second round of French presidential election
- 10, 17 Jun - French legislative election
- 1 Jul - Mexican presidential and legislative elections
- 27 July-12 Aug – London Summer Olympics
- 27-30 Aug - US Republican convention
- 22 Sep - HK legislative elections
- 15 Oct - 18th congress of the Communist Party of China announced (next
- 6 Nov - US presidential election
- Dec - South Korean presidential elections
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Taiwan
First up-to-bat is Taiwan with executive and legislative elections occurring tomorrow, Saturday 14 Jan. Going into the election incumbent Ma Ying-jeou appears to have a slight edge according the last opinion polls (polls are not allowed within the 10 days before an election).
Ma is chairman of the Kuomintang (KMT), which is more pro-China than the second most popular Taiwanese political party, the Democratic Peoples Party (DPP), which has in the past favored full independence. The DPP's presidential candidate is Dr. Tsai Ing-wen.
Ma polled at 43-44% and Tsai at 36-37% in two recent polls. A third put Tsai at 50% and Ma at 43%. A third candidate, James Soong is polling at between 5-7% and is seen to take more votes away from the incumbent Ma.
However according to locals either Ma or Tsai could win and recently the press has agreed with this. This is different than the last election in 2008, when it was widely, and correctly, expected that the “pro-China relations” candidate Ma Ying-jeou would win.
The Ma administration moved quickly to expand cross-straights ties. Direct flights between Mainland China and Taiwan now number over 200 per day according to a recent local newspaper article, and China is Taiwan’s largest trading partner as well as its largest foreign investment target.
The reason Ma is facing a hard fight is that many Taiwanese feel that the increased ties to China has benefited the wealthy without bringing much to the rest of the island’s 23m people. Since his election Taiwan’s wealth gap and unemployment have both increased.
Taiwan's 1m+ annual Mainland tourists are typically on budget tour packages, and there has been little if any investment from China. Lastly, trade with the Mainland is slowing, having grown by an estimated 9% last year, down from 37% in 2010.
Either way Taiwan will get a very educated leader. The incumbent Ma Ying-jeou has a bachelor’s degree in law from Taiwan’s most prestigious university, National Taiwan University, a masters in law from New York University and a SJD from Harvard. Tsai Ing-wen also has a bachelor’s degree in law from National Taiwan University, a masters in law from Cornell and a PhD from the London School of Economics and Political Science.
From discussions in Taipei, a real possibility could be one party controlling the executive branch and one the legislature. One very educated person I talked with in Taiwan is thinking of splitting her vote between the two in a bid to bring some check-and-balance to the island’s politics.
My guess is that cross-straights political risk is not likely to change much due to this election no matter who wins. Tsai Ing-wen and the DPP are not focusing on foreign affairs but more on domestic policies, and have dropped their hard-line call for independence.
But take this with a grain of salt. It is very difficult if not impossible to model and predict with any certainty public policy and what politicians will do once elected. For instance, and if I remember correctly, during his first presidential campaign, Lula de Silva was painted by the press as a die-hard socialist and compared to Venezuela’s Hugo Chavez. Under his leadership Brazil had one of its largest economic growth spurts.
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