The rocket-fueled ascent of Asia is now an old story. So perhaps we shouldn’t be bothered by BCG’s latest report which shows private Asian wealth has just surpassed Europe’s for the first time in centuries.
The report calculates that Asia (ex-Japan) now has private assets totaling $47.3 trillion, while Europe has been left in the dust with a wealth of “only” $42.5 trillion. That puts Asia ahead of Europe for the first time in a very long time. And it puts Asia on track to surpass the US sometime between next year and 2019.
We respectfully disagree with their near to mid-term confidence. We think BCG’s carry-forward predictions are distorted to the upside. The risks of a near term correction are acute.
How long has it been since Asia had the lead?
The last time Asia was even comparable to Europe was before what Samuel Huntington termed, “The Great Divergence” — that period in history where Europe pulled ahead of Asia due to innovation, early industrialization and energy production and other factors.
As you can see, before the 1800′s, Europe’s lead over Asia was small, but exploded upwards in the mid 1800′s, leaving China and India far behind.
But that, as they say, is so last century.
Needless to say, the recent catch-up, and then overtake of Europe by Asia is an extremely important macro development. For the USA The Great Divergence which began in the late 1850′s is projected by BCG to end next year. In economics, trend reversals don’t get much more epic than that. This is as major a trend-shift as one ever sees.
Among the new report’s more striking statistics is the fact that China created over one million new millionaires last year. This year China is expected to easily hold on to its #2 spot as the world’s second wealthiest nation. And Bloomberg writes that Asia-Pacific is expected to surpass the US in total private wealth by 2016.
Asia Pacific (ex-Japan) is projected to have $57 trillion in private financial wealth in 2016, surpassing North America’s $56 trillion.A strong “old world versus new world” dynamic is driving the wealth shift, the BCG study found. Asia-Pacific (ex Japan) recorded the fastest growth in wealth in 2014, with an expansion of 29 percent.
And the projections below project Asia (ex-Japan) as wealthier than North America by a comfortable margin in 2019.
What are the chances of a near term reversal?
In a nutshell, BCG relies on inputs that consist of highly volatile paper-wealth, and it rely on macro-market stability that simply isn’t there.
We’re always entertained when economists make projections by extrapolating past-trends on to the future, despite being consistently reminded by reality that that doesn’t work. Even if it is the relatively near-future we’re talking about. It’s particularly amusing when “economists” do not at any point incorporate even the smallest possibility of negative growth — even though 2019 (above graphic) takes us well beyond the expected time-frame for our current economic cycle. Never mind that 100% of our current growth comes from completely unsustainable measures. And never mind that China’s valuations are built on accounting magic. According to BCG there will be future growth because … there was past growth. Or something like that.
But let’s for a moment leave behind the ridiculous estimates, and take a look at the current data those estimates are built from.
As BCG writes:
In nearly all countries, the growth of private wealth was driven by the strong rebound in equity markets that began in the second half of 2012. All major stock indexes rose in 2013, notably the S&P 500 (17.9 percent), the Nikkei 225 (56.7 percent), and the Euro Stoxx 50 (14.7 percent). This performance was spurred by relative economic stability in Europe and the U.S. and signs of recovery in some European countries, such as Ireland, Spain, and Portugal. A further factor, despite the tapering of quantitative easing in the U.S., was generally supportive monetary policy by central banks. In an exception, the MSCI Emerging Markets Index fell by 5 percent.
Globally, the growth of private wealth was driven primarily by returns on existing assets. (See Exhibit 2.) The amount of wealth held in equities grew by 28.0 percent, with increases in bonds (4.1 percent) and cash and deposits (8.8 percent) lagging behind considerably. As a result, asset allocation shifted significantly toward a higher share of equities.
So growth is attributed primarily to equity markets and existing assets. Apparently if existing assets (valued with unicorn accounting) have been bid up for the past few years, they’ll continue to get bid up for a few more?
One reason this logic is particularly questionable in the case of China is simply, this:
When one sees a text-book “blow off top” like the one above, we’re not comfortable continuing the trend out more than a month or so — let alone 4 years. (Particularly when so much wealth has accumulated in thinly-traded equities.) The risk of a serious reversal over the near to medium term is acute. And with said reversal we would expect, shall we say a wide blast radius.
China’s private wealth is a house of cards. Additionally, there are multiple macro factors that are severely limiting emerging-market growth in the near term. There are dozens of scenarios — all of which have a decidedly non-zero probability — which would result in a double-digit percentage loss to China’s private wealth.
China’s low-cost future is highly questionable
Furthermore, China’s future as the world’s manufacturer is decidedly uncertain. As BCG themselves pointed out this April, China is no longer the cheapest place in the world for manufacturing. This came as a huge surprise to many, who assume that China is still an extremely low-cost nation to manufacture in. Those days have already passed. There are now many cheaper options. And many others still that have become too expensive to be competitive. Particularly notable among cheaper options is Mexico.
In manufacturing, Brazil is now one of the highest-cost countries, for example, and the UK is the cheapest location in western Europe. Mexico now has lower manufacturing costs than China, while costs in much of eastern Europe are basically at parity with the U.S. These are among the findings of the new analysis, which is part of BCG’s ongoing research into the shifting economics of global manufacturing. Cost competitiveness is becoming increasingly important as organizations around the world rethink their manufacturing networks and as governments recognize the economic importance of a stable manufacturing base.
…Many companies are making manufacturing investment decisions on the basis of a decades-old worldview that is sorely out of date,” said Harold L. Sirkin, a BCG senior partner and a coauthor of the analysis. “They still see North America and western Europe as high cost and Latin America, eastern Europe, and most of Asia—especially China—as low cost. In reality, there are now high- and low-cost countries in nearly every region of the world.
Clearly, what worked for China’s wealth creation in the past, is unlikely to carry forward with the same momentum into the future. And granted, we are conflating China and Asia often here — but China’s equity bubble is historic and carries with it enough destructive force for severe negative potential. We do not see any reassuring mechanism by which it can be safely deflated without a severe negative impact on regional growth.
Ultimately, the prediction that Asia’s private wealth will surpass the US’ private wealth by 2016 relies on two measures:
- How well current trends presage future growth?
- How wealthy is Asia now?
Not only is number 1 highly uncertain due to geopolitical, macro-economic and industrial realities. Number 2 is deeply uncertain given the volatile and ephemeral nature of China’s new paper wealth.
Will Asia’s wealth eventually surpass America’s? Almost undoubtedly. But the risk of near term reversals is high.