The reason to expect a growing valuation premium both relative to history and relative to developed stock markets in both America and Europe is simply that such a valuation differential makes increasing fundamental sense. This is because of the continuing resilience shown by Asia’s largest economies, such as China, India and Indonesia. CLSA’s economics team is forecasting real GDP growth of 10%, 8.8% and 7% respectively for these three economies in 2010. It also remains self-evident that Asia is not vulnerable to the same systemic risks that are so in evidence in America and other leveraged economies in Europe. This reflects the Asian region’s continuing lack of leverage, be it at the government, corporate or consumer levels. Thus, the net debt-to-equity ratio of CLSA’s Asia ex-Japan universe is only 20%.
Clearly, the Western world’s policy ‘solution’ to the credit crisis was in the main only to add public-sector debt on top of private-sector debt. This was done not only by massive formal government borrowing but also by an increasingly promiscuous use of government guarantees, most particularly guarantees of bonds issued by banks. This means, as long argued here, that the next systemic crisis will most likely be a crisis of public-sector debt when investors lose confidence in Western government guarantees.