One of the bigger myths – and believe me, there are many – peddled to Joe Public is that he should invest in emerging markets.
For IFAs, who increasingly rule the roost of private savings, this is an easy sell. What could be more logical than to go to where economic growth rates are highest?
Actually, the long-term performance of emerging markets is nothing very special at all. At best, they have been no more than a geared punt on the broader global equity market. To understand why, let me tell you about Cheng Li…
The golden touch
He was born in Hong Kong in 1955, and shared a room with his parents, his four brothers and three sisters. He spent his childhood days roaming the streets of Hong Kong, looking for any way of boosting the family income.
When he started proper work at the age of fifteen, he swept the floor of the clothing factory where his father worked. He hardly went to school. To this day, he does not speak English, and since I don’t speak Chinese I have relied upon my Chinese wife to translate his story.
There is not a person in Hong Kong and probably the whole of China who is not obsessed with making money. Gambling is one route to riches and when not sweeping the factory floor, Cheng was at the Happy Valley racetrack.
He found that’s he was pretty good at picking winners and when he graduated to playing the stock market, he mastered that as well.
By the time he married Cindy he was doing quite well for himself, but one thing nagged at him. His father told him of his one regret…
He wished that, instead of working in a clothing factory making profits for the bosses, he had owned the factory for himself. He urged Cheng to set up his own factory, but he would not take the plunge. But his wife was determined, ‘If you are not going to do it,’ said Cindy, ‘I am.’
Cheng gave Cindy some money and off she went across the border to China to open a factory…
Six months later she came back, crestfallen. The little factory that she had established was failing and she had lost all the money.
Cheng decided to try and salvage the situation. But, in a society in which women traditionally hold the purse strings, and knowing his wife’s nature, he made one condition…
‘I am going to China to see what I can do,’ he told Cindy. ‘But you must not interfere.’
Now it was Cheng’s turn and he made two big decisions…
In spite of the fact that he had no customers, he was going to make the factory three times as large. He was also going to buy a big new car. ‘A guy with a big factory, driving a smart new car is going to be taken seriously,’ he reasoned.
He was right. Textile manufacturers came knocking on his door, keen to supply him. Local officials liked the idea that Cheng would provide employment on their patch and, for such is the tradition of Chinese bureaucrats, they figured that there might be a nice rake-off to be gained in exchange for issuing a few permits.
Cheng chose to specialise in clothes for babies, and the business got going. He found customers but since he could not pay his suppliers until his customers had paid him, and since his customers did not seem to make that a great priority, cash was always tight.
One day a bean counter from one of his suppliers came to visit him. ‘It seems, Mr Cheng,’ said this gentleman, ‘that your account with us is somewhat overdue…’
Cheng knew this to be true and that he could not, at that moment, pay his debt. Rather than apologise and beg for more time he stood up, put his hands on his hips and gave the supplier’s representative an earful…
‘I have trusted you to supply me,’ he roared, ‘and now you don’t trust me? Do you want me to take my business elsewhere? How dare you insult me like this?’
The representative slunk away. A week later his boss took Lee to a lavish lunch. He said there had been a misunderstanding and apologised profusely.
China is no longer the place to make clothes – costs have risen too high. But in Cheng’s time it was the world’s manufacturing centre and he made millions from the business. He then made more millions from ownership of the land occupied by the factory.
When I first met him, he had six large cars parked outside his house in Hong Kong’s Sai Kung district. Now he has retired from work, he just makes do with a Porsche and a BMW…
He is still with Cindy and they have two sons, both of whom are qualified accountants working for big firms. I asked Cheng if he wished they had been entrepreneurial like him. ‘Yes,’ he admitted. ‘But unlike me, they had an education. They could see the pitfalls. I never had any fear. I had nothing to lose.’
A land of greasy palms
Cheng has told me many stories about business in China, most of which would make your hair curl…
In China you need to know whose palms to grease. You need to avoid the attention of the triad gangs. There is no legal redress. It is all about who you can trust and who you cannot.
As for rules and regulations, one of Cheng’s accountant sons explained to me that Chinese companies do not see accounting rules as things that must be obeyed, but as hurdles to be overcome.
If not a Wild West, it is a Wild East, and if you don’t know how to play the game you will be stung.
These days Cheng plays the stock market, and still has the golden touch…
He has been successfully backing new issues on the Hong Kong stock market, many of which have been surging to huge premiums over their offer price. And he has been reading the runes of Chinese officialdom.
When I was in Hong Kong earlier in the month, global markets had a sudden sell-off. In the western world at least, this was attributed to US jobs data that pointed to rising interest rates. This is not what Cheng had heard.
No. According to him, there had been a secret meeting in Washington between Chinese and American officials in which it had been agreed to lower the market.
Don’t ask me why they would want to do this, or whether there is any truth in it. That is not the point…
China is a society that has been governed by edicts issued from up on high, and passed down the many layers of officialdom. If China’s governors say that something is going to happen, it must happen. If they say that something is true, then it is true. Anyone who dares to doubt is liable to disappear.
The Chinese have ways of controlling the stock market. They can simply ban the selling of shares if they want to. But because of their power they don’t actually have to do much at all. They just put the word out that they would like to see the market up or down and since nobody will do anything contrary to their wishes, it just happens.
A very different game indeed
One of the most successful investors in western markets in the 1990s was Fidelity’s Anthony Bolton.
In 2009, with a tremendous fanfare and massive support from slavish IFAs, he raised hundreds of millions of pounds for a new China fund. It was a disaster. Bolton expected that his analysis of Chinese companies would yield the same profits he had made elsewhere. Instead, he found that the numbers he was crunching were themselves fictitious. ‘The Chinese are great liars,’ was his final verdict.
So if you are tempted to invest in China or any other emerging market, wise up.
Trust nobody, don’t believe the figures, realise that corruption is endemic in all emerging markets without exception, and that the interests of foreign shareholders are at the bottom of the priority list.
And there is one more thing…
Smartphones have changed everything. The most analysis any Chinese punter does these days is to look at a short-term price chart on the small screen. He is ready to press the trigger at any moment. The average holding time for stocks is measured in hours.
When I told Cheng that I had held some of my most successful stocks for upwards of fifteen years and cared only about the progress of the business and not daily movements of their share prices… he just laughed.
In China, the game is played in a very, very, different way.