We have corporate transparency issues. We have terrorism. We have debt problems. But we also have a system of accountability, a media bent on exposing crooks, a legal framework for dealing with wrongdoing, and a culture that allows both success and failure on the merits for each person and each enterprise. Ultimately, our entrepreneurial economy is more adaptive than those in which government insulates favored businesses from competition or from the natural consequences of poor decisions.
China sports a real economic growth rate of something like 8%. Its trade surplus with the U.S. is surging. We harbor suspicions about the legitimacy of their low wage costs, but U.S. consumers do not hesitate to load shopping carts with China's attractively priced output. Should we invest in China? China region funds were down 11% for the first 11 months of 2002, less than U.S. stocks, and lost 8% a year for the last three years, which isn't so awful, I suppose.
But there is a huge debt problem lurking beneath the surface, one that could prove devastating to owners of Chinese equities. That nation's central bank estimates that 25%-30% of bank loans are not current. Outside sources place the likely defaults at between 25% and 50% of GDP. To put that in perspective, the S&L crisis in the U.S. at its height involved bad debts equal to less than 5% of GDP.
Japan, of course, is also trying to cope with its own corporate deadbeats. A writer in the Asian Wall Street Journal recently placed the island nation's bad loan burden at 75% to 100% of GDP! Referring to the cozy relationship between government and major banks that covered up poor credits for years, a recent WSJ editorial claimed, "Bureaucrats have run Japan into the ground."
Several years ago, it seemed to me that Europe might present one of those wonderful investment opportunities that are not available in the U.S. P/Es were lower than ours, and the unification efforts seemed to be ushering in a strong trend away from socialist policies and toward free-market democratic capitalism. If the experiment were to succeed, I reasoned, European corporations would become more competitive, and its work force more productive. Growth would rise and public interest in investing could mushroom as it has in the United States. I thought I just might be getting in at the start of another great bull market! But, alas, as Euroland struggles to emerge from the recent recession, its politics seem to be shifting left again. Protectionism and its corollary, double-digit unemployment, appear intractable after all. So I am giving up on Europe's willingness to imitate our successes.
Are there investment opportunities abroad? Undoubtedly there are. Am I able to perceive them? Not so far. Are there mutual fund managers or teams that I can depend on to ferret out these opportunities for us? I'm not sure. But if the cost is 2% or more in annual mutual fund expenses plus currency risks or hedging costs, then I am from Missouri on that one.
There are approximately 11,000 public companies to choose from in the United States. Is my opportunity set so limited that I need to risk my retired clients' assets in foreign currencies, in nations where I have more serious misgivings about transparency and corporate governance than I have at home, and where the dominant business culture is far less adaptive than it is here?
Baseball fan Warren Buffett likens investing to standing at the plate waiting for a good pitch. But in investing, he says, nobody is counting balls and strikes. You don't have to swing until you see one you really like. I am standing at the plate on behalf of my retirees. The foreign investing pitch looks to me like it is low and outside. I'm not swinging.
J. Michael Martin, JD, CFP, is president of Financial Advantage in Columbia, Md.