In markets – and in US markets above all – the most crucial lesson from 2020 was a reminder: the stockmarket is not the economy.
Yes, earnings cycles in aggregate move with economic cycles. But index concentration in secular growers and gargantuan price-to-earnings (P/E) multiple expansion hammered home the point that the stockmarket and the economy can have divergent paths, even during a multi-generational recession.
Asia has boasted extraordinary nominal growth rates over the past 20 years. China's growth miracle was an outsized contributor, growing from $1trn to more than $14trn over this period - a compound growth rate of nearly 15%.
But the rest of Asia was none too shabby, growing from approximately $950bn to $6.5trn, compound growth of almost 2x the world average at nearly 11%.
While this is an economic miracle, it was not a miracle for the stockmarket, where Asia ex-Japan outperformed global equities between 2000 and 2010 by 150%, but then underperformed in the subsequent decade by a quarter.
During this second decade, Asian nominal GDP grew almost 4.5x quicker than global nominal GDP. Asian economies arrived, but equities absolutely did not. What has been going on?
The $6trn Chinese elephant in the room
Everyone with a passing interest in China has a favourite fixed capital formation stat. One of the most eye-catching is that between 2011 and 2013, China consumed more cement than the US did in the entire 20th century.
This boom in fixed capital formation added handsomely to GDP and created a lot of jobs. But it also resulted in slack in the economy, with some estimates for the automotive industry suggesting that by 2019, capacity utilisation was scarcely more than 50%.
And what we can see in industrial state-owned enterprises is the impact in aggregate on profit margins, which roughly halved between 2008 and the 2016 deflationary scare trough.
For the China investment tourist, the economic growth rates were tantalising. But the reality is that earnings revisions and investment returns were on a completely different track from the economy, and were, in fact, a victim of runaway capacity growth.
Fast forward to late 2020 and the picture is changing materially. Supply discipline in previously oversupplied industries has rationalised and earnings power has returned in some cases, against a backdrop of slowing headline GDP.
South and Southeast Asia's US dollar problem
China is a big part of everything in Asia. But it is not everything. India and Indonesia experienced a very different headwind in this post-2010 period, despite spectacular levels of nominal GDP growth.
In contrast to China's excess national savings and external surpluses creating seemingly free capital, India and Indonesia's deficits made (and continue to make) them particularly vulnerable to periods of US dollar strength tightening domestic financial conditions.
Earnings per share for MSCI Indian and Indonesian indices in USD between 2010 and 2019 fell by 7% and 17%, respectively. In both cases, even underlying local currency earnings were subdued versus the previous decade.
Similar dynamics were also at play in the Philippines, Malaysia, Singapore and Thailand. Together, these countries were 28% of MSCI Asia ex-Japan at end-2010, and 22% by the end of 2019.