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The Price of Democracy



November 05, 2009 – Comments (10)

Take a look at this table:

Anybody else find int strange that of these 4 major emerging markets, the least democratic is the one that investors are willing to pay the wides premium to own? That's going to come back and bite somebody methinks.

10 Comments – Post Your Own

#1) On November 05, 2009 at 2:11 PM, brickcityman (< 20) wrote:

Well there are a couple of ways to look at this....


1.  Its not strange because these economies have yet to realize the "blessings" of democracry and so they are poised for growth once their population gets a taste of the sweetness of the democracy fruit....  (sarcasm meter should be pegged).


2.  These economies are the only ones left where capitalism yields superior return on investment to the investor class.  In developped economies the investor class has to give up more of the pie to those pesky, semi-educated, semi-organized, ruffians that actually "work" for a living.  Once the unwashed masses become lightly fraganced masses with 401Ks the pie is divided into too many pieces and no longer tastes as sweet.


3.  The cost of lobbying in these countries is pennies on the dollar compared to developped nations.  Way few palms to grease means more profit.


... should I go on?

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#2) On November 05, 2009 at 6:01 PM, TotalReturnInv (97.87) wrote:

Not surprising at all, most of the time countries move to capitalism as a one party state - Japan, Mexico, South Korea, and Los Estados Unidos, to name just four examples.

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#3) On November 05, 2009 at 6:27 PM, Tastylunch (28.71) wrote:

people pay for capitalism not democracy if you ask me

but yeah invetsing in China is perilous due to this

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#4) On November 06, 2009 at 1:06 AM, streetflame (29.26) wrote:

The interesting thing is how much prices vary across the Chinese market.  It seems to me a large majority of Chinese stocks listed in the US have P/Es way below 41. There are bubbles in finance/real estate and web/software/tech, but other areas of their market look positively cheap.  Particularly small cap stocks.

Here are 10 largecap Chinese companies with current PEs.

PTR 12
CHL 12
LFC 44 (6.4x tb, 5.5x sales - some evidence of a financial bubble)
SNP 13
CEO 11
CHA 295 (1.2x tb, 1.1x sales, coming off depressed earnings)
ACH N/A (2.1x tb, 2.1x sales, coming off depressed earnings)
BIDU 168 (evidence of tech bubble)
YZC 30 

Then, just for fun some smallcap Chinese stocks:

WH 5

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#5) On November 06, 2009 at 1:25 AM, streetflame (29.26) wrote:

I like the comments above.  Brickcity's point 2 is interesting. I think cultural issues are very important when investing.  For example, Japan's continually underperforming market is a reflection of their cultural/government priorities (although they are highly corporate, they prioritize workers over investors much more than the US or even Europe).  You might think that communist China could fall into a similar pattern.  On the other hand, maybe the pie is so big right now that there is no need for compromise between competing interests (yet).

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#6) On November 06, 2009 at 3:06 AM, GundersonGroup (28.14) wrote:

"All stocks have symbols. All bonds have symbols. Therefore, all stocks are bonds." -  Attributed to TMFAtypicalBlogger advice

The UAE has a democracy rating of 98 and a P/E of (around 11?), so no correlation between your two data sets.

!!This does not mean that the data set you chose is indicative of over or undervaluation!!

If you want correlation so you can do valuations see below.

IMF Real GDP growth forecasts:

China 9.0%

India 6.4%

Brazil 3.5%

Indonesia 4.8%

UAE 2.4%


There are plenty of reasons to be concerned about investing in China, but the lack or presence of democratic institutions is not correlative to equity values.

However, consider the following.

Two companies exist, one where working capital is managed very efficiently, so efficiently in fact that there is no room for improvement. The second company is half as efficient in managing their working capital. Assuming all other factors are stable and applied equally to both companies which would you invest in?

Hint - Replace working capital management with democratic institutions and improve both to their fullest.

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#7) On November 06, 2009 at 3:59 AM, memoandstitch (< 20) wrote:

Maybe a communist regime can put together a better stimulus package?  I doubt.  It's the person who sets the policy, not the way he is appointed, that makes the difference.  No regime can consistently elect smart, responsible, scrupulous policy makers.

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#8) On November 06, 2009 at 7:34 AM, JakilaTheHun (99.91) wrote:

There is an alternative thought here --- democracy is inefficient and wasteful; a technocratic state is better able to respond to challenges facing it.  I'm not saying this is true --- just that's it's an alternative rationale. 

There's also another alternative here --- much of China's economic growth is a mirage propped up by a governmental class that does everything it can to distort economic growth.  So there's that.

One way or another, there is some irony here.  We constantly hear investors like Jim Rogers talk about how great China's growth prospects are, while simultaneously condemning the US government for "communist policies." 

I can't say that I've agreed with a lot of the government's responses to this crisis, but this is the ultimate irony here --- railing against government intervention in the US, but loving much greater government intervention in China.  

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#9) On November 06, 2009 at 9:51 AM, TMFMmbop (29.20) wrote:

@Gunderson Group

I didn't make any comment about whether I believe China or over- or under- valued. Further, I'm keenly aware of China's best-in-the-world GDP forecast.

But to throw a wrench in your hypothetical, would you rather invest in a company with 50% efficient working capital management or 100% efficient working capital management, but an unpredictable (though small probability) call right to take away your shares at any time with no recourse to you and no compensation.

It makes the choice a little more difficult.


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#10) On November 09, 2009 at 3:28 PM, hhasia (65.06) wrote:


This table is corn-bull!

China is a closed market. 

Mainland investors have no outlet off shore for an alternative investment. Limited for choice (mom-and pop don't invest outside) leaves two alternatives: Stocks and real estate.

With limited choice, what seems high when viewed with the eyes of an open market investor, is not to the punter in Shanghai.

All of the other markets are open. Those residents have an abundance of choice, so the valuations reflect that environment.

A clear example is the China/ Hong Kong premiums, for the same companies. The China valuations are NOT a reflection capital management.



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