Previously published in Global
Markets Trader and ThaiStocks--January,
Global Pension Money Seeking Value Shares
The global pension
crisis is paving the way to new investment opportunities and could be one more
piece of evidence to support Paul Renaud's long-term recommendation of owning
the deep stock values of Thailand
The global pension reform trend, combined with greater individualism, equal growing possibility for local SET
The global pension crisis is paving the way to new investment opportunities and could be one more piece of evidence to support Renaud’s long-term recommendation of owning the deep stock values of Thailand. The US trend is going global, meaning substantial savers from developed and some emerging economies will increasingly have direct ownership in shares, which will in turn help boost the vast retirement capital available when the time comes. Certainly the global pension crisis is not breaking news. However, it seems that the time to take action is coming very close as several governments begin experimenting with non-state-run pension alternatives. Similarly, the mid-to-late 1990s saw mass deregulation of the retirement fund industry in Japan and the government continues to seek to increase returns to corporate pension funds.
Now Europe’s past ambivalent attitude toward private pension seems to be changing as well. The inadequate performance of pension funds has made reevaluation necessary and governments are finally adopting the theory that to delay further will only worsen the situation. In an attempt to push things along, The European Commission recently proposed guidelines for a single European market in pension funds in order "to make it easier for funds to invest beyond national borders and shift from government bonds and other fixed-income securities to stocks."
A global crusader for change, Jos้ Pi๑era, says that thanks to a sharply declining birth rate and longer life expectancy, there are now an average of only four people of working age to support each pensioner in the 15 member states of the European Union. By 2040 there will be only two, and in some countries like Germany the ratio of workers to pensioners will be closer to one to one.
"Many under-40 members of today's working population may end up on income support to make ends meet in the next few decades, even though they pay up to 20% or more of their income in social security taxes"." He says Europe's so-called pay-as-you-go (Paygo) principle "worked half-a-century ago in a world where there were seven or more workers for each retiree, who typically lived only a few years after he left the work force. "
But today, falling birth rates and longer life spans are undoubtedly global issues as are job insecurity and unemployment. With payroll taxes already well over 25 percent in many countries of Western Europe, and 50 percent in some countries in Eastern Europe, governments and workers are both equally anxious. Some countries, like Germany and Italy have already recently introduced private pension funds, and in countries lagging behind, like France, it seems individuals are taking matters into their own hands.
According to a recent New York Times article (27 Dec 00) a growing number of individuals are not waiting for the governments’ proposals and have begun investing on their own, more than doubling the European figures of investors five years ago. Cyberspace, catalyzing the democratization of Wall Street, is the mode of border-less individual investment independence. The fast-growing international market of workers, dissatisfied while increasingly wary of their financial futures, are becoming savvy along with the hoards of Americans already in the investment arena.
The US got the ball rolling a decade or two ago, but there is certainly much in pension restructuring left to be done, as the nominees of the past elections agreed. The ideas proposed by President-elect Bush mean that social security reform will be one more push toward the dominant trend that has nearly doubled the percentage of the population owning shares in the U.S., in only 12 years. As more Americans are choosing to invest globally with their 401k programs they can expect to meet millions more around the world with similar pension program alternatives.
"A worker who invests even a limited portion of his or her paycheck could, over a career, end up with hundreds of thousands of dollars for retirement," Bush states.
With the new Republican plan to deregulate part of Social Security, the US would be falling in the footsteps of several countries already having success with similarly radical plans. Chile is one country giving the world a new model to learn from. By privatizing their pension program they went from having average retiree savings with a negative rate of return and replaced it with an annual return of 9%. (See the speeches given at the conference in London "Solving the Global Pension Crisis" and the essay "A way out of Europe’s Pension Crisis" by Jos้ Pi๑era, former Minister of Labor and Social Security, for a detailed analysis of these programs.)
As governments worldwide experiment with possible alternatives to alleviate flailing government pension programs, the chances are ever-increasing that conservative, strictly-administered government and private pension funds will be replaced by flexible, individually chosen portfolios. These new portfolio's, it would seem, will favor values and long term capital gain prospects over just trading liquidity. Hence, the potential is for increasing interest in smaller, less liquid value shares since buyers will be thinking longer term; where perceived value and dividend income is far more important than share liquidity or trading.
Increased interest in mutual funds is another feasible assumption, taking for example the case of Sweden’s recent changes, but being the more conservative, limiting and inflexible option, it is one that seems to lack the sense of strong individualism sweeping the globe.
Clive Crook, deputy editor of The Economist, boldly states: "If we privatized Social Security—or, better yet, if we made all retirement savings voluntary—people would not feel that they could rely on the state in their old age and would begin to take responsibility for their retirement early in life. Such a change would produce marked increases in both individual liberty and self-determination and a marked decrease in dependence on the state."
Self-determination and individual liberty seem to be buzz words in Asia as well. The Asian Wall Street Journal (3 Jan 01) featured an article on the theme of the rise of individualism among Japanese, a clear result of the decade long economic slump. The article includes the individual investor as a crucial player in this trend. Bankruptcies, bank failures, takeovers and unemployment are causing more Asian workers to take their futures into their own hands. In Japan, the article states, they are starting to call this the "era of personal responsibility."
Such widespread change is certain to have a ripple effect. Countries like Thailand, who show promise among emerging markets, will attract more investment attention from around the globe. Also, investors considering retirement will be more interested in stocks with better long-term growth prospects and less market correlation to the big stock markets around the world.
In summary, the case for smaller cap SET value shares seems
1. Many secondary shares here on the SET trade at a fraction of the valuation of stocks in more developed markets. By any measure, many are true "diamonds in the rough".
2. Unlike the Thai liquid blue-chip stocks, almost all secondary Thai firms do not correlate much to the local SET benchmark and so even less to the movements of markets back in their home country. To any rational long term investor, this is a desirable portfolio feature.
3. Countries like Thailand are full of young people and, over a longer period of time, so grow faster than the more mature developed markets.
The global pension crisis is sure to inspire more and more cyber-savvy international investors. The new millenium’s climate of individualism, self-determination and personal responsibility will introduce a new era for the stocks of the strong emerging markets of the world, certainly including Thailand as a forerunner in this wave of the future.