The lost decade in the East could be over, and if it is, msci Asia-Pacific equities will be a big winner

Japan is commonly used as the poster child of Asia’s economic problems. The country has experienced not one, but more than two lost decades as for 25 years what was the region’s largest economy has experienced sluggish growth and low inflation.

However, there are now signs that Japan is starting to pull itself out of the hole. The June Tankan survey of large manufacturers showing the highest confidence in over three years. A similar Reuters survey across the manufacturing sector showed the highest level of confidence in a decade. Meanwhile, the jobs-to-applicants ratio is close to 1.5, the highest level since 1974, real wages are growing at the fastest pace since 2000, nominal GDP is at an all-time high after five consecutive quarters of GDP growth and corporate profits are surging with earnings per share for the Topix over ¥110 per share, compared with ¥25 back in 2000.

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But Japan isn’t the only Asian economy that is struggling to return to its former glory. After a military junta took over the running of Thailand in 2014, the country has been unable to get its much-needed reforms off the ground and capitalize on its position as South East Asia’s top tourist destination. Thailand's roughly 3% GDP growth rate is the slowest among Southeast Asian peers with the Philippine economy, by contrast, is expanding more than 6%, while Indonesia's is growing above 5%.

msci asia-pacific
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Like Japan, economists believe Thailand could be the next Asian nation to succumb to a lost decade. The nation will see its working age population shrink by about 11% by 2040 and consumers are highly leveraged with gross non-performing loans hitting 3% in the first quarter of this year.

Thailand’s poor economic performance is made worse by a strong performance of its neighbors. In fact, the recent strong performance of equity markets across Asia has inspired analysts at investment bank Bernstein to proclaim that the region’s lost decade is now over.

MSCI Asia-Pacific: A Strong Recovery

Over the last ten years, the annualized return for the MSCI Asia-Pacific ex-Japan and MSCI EM index has been a 4.5% and 2.6% respectively, lagging the S&P 500 and NASDAQ significantly. But Asia’s equity performance hasn’t always been so terrible. Between 2001 and 2007, the MSCI Asia-Pacific ex-Japan outperformed the S&P 500 on a total return basis by at least 1000 basis points every year for an aggregate outperformance of 264%.

Year-to-date, Asian equities have returned to their previous trajectory with the major indexes outperforming the S&P 500. Still, despite this performance, Bernstein argues that it might not be time to re-enter the market because, like the rest of the world’s markets, Asian equity markets look expensive. So, if all equity markets are expensive, is it worth investing overseas for more growth at all?

The answer to this question may be no. Bernstein points out that over the past decade the NASDAQ has offered far higher total returns than any Asian market or emerging market index with lower volatility. So has the S&P 500. The NASDAQ has offered the highest earnings growth over the past ten years with little volatility but without the corporate government risks or accessibility problems of Asian markets. In other words, considering all of the country, governance, and currency risks, the payoff from investing in emerging markets is not worth the risk unless they are outrageously cheap, which today they are not.