A Split View at the SALT Asia Conference

Americans like to think we’re the center of the world, and at the SALT Asia conference in Singapore last week, much of the talk indeed centered on the U.S. — in particular, our markets, interest rates, and monetary policy. Alas, we weren’t exactly cause for celebration, but concern.

While China’s complex reforms came up for mention, a central risk for the postcrisis global economy is the potential failure of the U.S. to achieve sustainable growth, says Tharman Shanmugaratnam, Singapore’s deputy prime minister and minister for finance. There is also the possibility that central banks’ drastic attempts to fend off a cyclical downturn might end up creating more vexing structural traps. And keep an eye on the stagnating middle class in mature economies, just as the middle class in emerging economies is starting to thrive.

“It’s not just an income issue, but the growing tension between generations,” Shanmugaratnam told the hedge-fund managers at the SALT gathering. “Too much has been promised relative to the economy’s ability to pay, or the younger generation’s ability to pay for these promises.”

So far, these issues have been tackled in piecemeal fashion, one election at a time. But the real problem — the lack of a viable long-term social compact — is left unaddressed. And a shrinking middle class in the U.S. is bad news for the rest of the planet.

Once upon a time, America’s middle class was both a beacon and benchmark for the rest of the world. Forty-five years ago, our per-capita gross domestic product was six times that of Singapore’s; today, this tiny island nation one-quarter the size of Rhode Island has vaulted ahead of the U.S.

Conspicuous consumption isn’t something to brag about, but everywhere you go, Singaporeans are attending with gusto to their twin national pastimes — shopping and eating. The conference, organized by SkyBridge Capital, was held at a 1.3 million-square-foot convention center linked to a 2,561-room hotel and casino built by Las Vegas Sands


(ticker: LVS) on land that Singapore reclaimed from the sea. The hotel is housed in three separate towers joined at the top by a “skypark” shaped like a giant surfboard. A 492-foot infinity pool — the world’s largest and highest outdoors — drips off one edge of the park. Say what you will about Singapore’s predominantly one-party government, but it gets things done — and quickly.

Meanwhile, the U.S.’ proudly two-party government struggles to rein in the budget and balance the debt ceiling so Uncle Sam can keep paying the bills on time. With U.S. stocks just 2% below record highs, the market expects Washington to put on its usual noisy show of governance, then do what it does best: Kick the can down the road.

THE POSTPONED TAPERING of quantitative easing has helped put a cap on rising U.S. interest rates and momentarily halted the flight of capital from emerging markets. Valuations have come down, and a bearish view on China is increasingly the consensus. So, is it time to make a deeper commitment to emerging markets?

Emerging markets have benefited from the decades-long shrinking of U.S. interest rates and the weakening dollar. Now that rates and the dollar have bottomed, it will take time before they outperform again. Adam Levinson, chief investment officer of Fortress Asia Macro Fund, thinks the unwinding of the emerging-market trade may be in just the second inning.

Emerging markets have lost some luster not only because the Fed might taper, but also because U.S. energy production is shrinking our oil imports and current-account deficit. “What QE has done is distort the valuations of cyclical stocks relative to defensive ones,” Levinson says.

Now, emerging markets compete for the same growth-seeking investment dollars as compressed cyclical stocks, and Levinson would rather browse, for example, among U.S. tech stocks.

Asia’s markets are hitched to China’s, where rabid loan growth has rightly given investors pause. The good news, says Jing Ulrich, vice chairman of Asia Pacific at JPMorgan Chase, is there’s little solvency risk, since Chinese banks are largely funded by “sticky” retail deposits that can’t leave the country easily. Local governments are saddled with debt, but the central government’s balance sheet is still quite healthy. Nonperforming loans could increase in the short term, but with banks trading near book value, their shares discount some of the bad news.

“Leverage is an issue,” says Joseph Zeng, a partner at Greenwoods Asset Management. But he estimates that the combined debt of local and central governments comes to about 120% of China’s GDP, a ratio he deems “manageable.” Beijing also has options, including select privatization of its vast state-owned assets, should it need to raise capital.

Eric Yik-Cheung Chow, a senior fund manager at Value Partners Group, thinks that China’s easing travel restrictions will benefit Asian tourism in general, and Sands China


(1928.HongKong) in particular.

Feng Hsiung, CEO of York Capital Management Asia (HK) Advisors, sees gaming as a proven theme in the Philippines. But while state-owned casinos there tend to be low-ceilinged, smoky, and crowded, Melco Crown (Philippines) (MCP.Philippines) brings Vegas-style bling to the sector, and shares are off 35% from their February peak. 

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A Split View at the SALT Asia Conference