Reminiscent of Hong Kong's 1998 equity buying spree, Asian nations such as Vietnam, Pakistan and Taiwan may boost their sagging stock markets by using government money to purchase shares. Bad idea.
The message that investors can expect to be extricated from their poor decisions isn't one that governments should be sending. And as millions of Asians are hurt by the global economic decline and accelerating inflation, stock investors represent a distinct minority.
Also, unlike in the US and Europe, most Asian equity markets aren't closely linked to their respective economies. For instance, the so-called free float of the US stock market -- those shares not owned by governments, families and endowments or restricted in other ways -- equals 90 percent of the U.S. gross domestic product.
The UK market's free float is 110 percent of GDP, while France's is 57 percent. By contrast, China's free float equals 17 percent of its GDP, India's 20 percent and Pakistan's minuscule 4 percent.
What's more, many Asian markets resemble volatile gambling arenas more than capital-raising enterprises. Should taxpayer funds bail out a casino?
China's CSI 300 Index has plummeted 49 percent in 2008, after soaring 162 percent in 2007 and 121 percent in 2006. The Vietnam Stock Index has plunged 53 percent since the end of December, following returns in the past four calendar years of 23 percent, 144 percent, 29 percent and 43 percent.
Indian stocks
The Bombay Stock Exchange Sensitive Index is another Wild West show. Following a 73 percent rally in 2003 and a 13 percent advance in 2004, the index rose 42 percent in 2005 and 47 percent in each of the past two years. This year, it's down 34 percent.
Government intervention
In August 1998, the Hong Kong government purchased HK$118.1 billion ($15.1 billion) of shares in the 33 component stocks of the Hang Seng Index. This equalled about 7.3 percent of the total market value and caused a big reduction in the free floats.
The government said the intervention was intended to deter speculators from shorting the Hong Kong dollar and stock market. The speculative attacks threatened to unhinge the Hong Kong dollar's peg to its U.S. counterpart and roiled equities.
The tactic worked. After falling 32 percent from May 1 to August 14, when the government began buying, the Hang Seng rallied 49 percent by the end of November. Even so, that's no guarantee other governments can pull off the same trick. Japan started buying shares after the stock market began crashing in 1990. Still, the Nikkei-225 Stock Average today equals only 34 percent of its record on the last day of trading in 1989.
Consumer response and impact
Consumers usually react to recessions and slowing growth by tightening their belts. That means consumer-staple stocks such as food, beverages, toiletries and tobacco often outperform consumer-discretionary equities, which include retailers, toys, automobiles and restaurants.
Starbucks Corp. operates restaurants that sell food and gourmet coffee products, while Britain's Marks & Spencer Group Plc is a retailer that sells food and beverages in addition to clothing and footwear. Both are hurting. Recognising that most folks don't regard frappuccinos and cafe lattes as essential drinks, Starbucks this week said it will close 600 US coffee shops and eliminate as many as 12,000 jobs.
Most of the 600 stores were opened in late 2005 and 2006. More than half of the new restaurants offered drive-through service, yet sky-high gasoline prices are prompting people to drive less.
Meanwhile, Marks & Spencer, which gets almost half its revenue from upscale food halls and is known for prepared meals, suffered a 4.5 percent decline in same-store sales of food in the 13 weeks ended June 28 -- the biggest drop since at least 1998. It faces increasing price competition from other food chains and discounters.
Investors who want to bet consumer staples will outperform should know their food and avoid gourmet labels.
Private vs public sector
An age-old debate is whether private-sector companies, managing what are normally regarded as public-sector responsibilities, can deliver superior service at a lower cost.
In an ambitious move that may shrink Britain's welfare state, James Purnell, the UK secretary of state for work and pensions, last week said private companies will be encouraged to propose ways to deliver welfare services.
This may involve designing educational and training programs to get the unemployed back to work, rehabilitate former criminals and recovering addicts, and care for the homeless, disabled and single parents.
"I want to give more power to customers, providers and regions," he said in a June 25 speech. "We are reforming the welfare state from an essentially passive one to a profoundly active one,'' he added.
Purnell's objective is laudatory. He had just better hope he doesn't end up in a mess like that which accompanied the privatisation of British Rail in 1993. Back then, the national rail network was sold to independent companies, while track maintenance was left in government hands.
The result was poor upkeep, delays and some major accidents. If the same happens to welfare, the UK may end up with more long-term unemployed and disadvantaged social groups than it had before Purnell took charge.
(The author is a Bloomberg News columnist. The opinions expressed are his own.)
