This is How Investors Should Be Playing Asia By the Numbers

 | Dec 09, 2016 | 8:00 AM EST
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Billy Beane would be more than a little confused.

He is famous for revealing, during his managerial career at the Oakland A's, that sabermetrics works. It's a process of turning numerical performance analysis into a way of identifying underappreciated players who are actually better than the eye of many a scout or TV pundit would see.

Quant analysts at hedge funds and value investors must be proud. But what would they make of the statistics coming out of Asia, right now?

The very top statistician in China has admitted that the country's numbers aren't always to be trusted. At the same time, a revision in the way Japan calculates its economic output has caused its gross domestic product to jump 6.3% overnight.

At least Japan's leap is legitimate. The country is simply adopting new standards from the United Nations on how a country should count its output. But the jump is particularly high in Japan because it spends just about the highest amount of money in the world, pound for pound, on research and development. The new rules have now started treating spending on R&D, patents and copyrights as investment, adding that factor to GDP for the first time.

That makes sense to me. R&D is certainly work, and spending on it should count toward your output, to my mind. To indicate just how much Japan, with strong industries in biotechnology, electronics innovation, materials sciences and the like, invests in the future of its companies, the redefinition has boosted U.S. GDP by only half the amount, 3.2% to be exact.

China's case is a sharp contrast. Many people have long doubted its official output figures. I said so myself in my column for TheStreet in April, asking whether China's vaunted growth might not be half the 6%-plus it now claims.

Official confirmation hasn't gone that far, but it has said some of the inputs should be put out to pasture. Quarterly GDP figures out of China are suspiciously stable, and now we have official confirmation on why.

"Currently, some local statistics are falsified, and fraud and deception happen from time to time, in violation of statistics laws and regulations," Ning Jizhe, director of the National Bureau of Statistics, wrote in a column for the state-controlled, official People's Daily on Thursday, according to the Financial Times.

It seems to be the latest bullet fired in President Xi Jinping's war on corruption. Ning's predecessor, Wang Bao'an, is under investigation by China's anti-corruption watchdog. So now local party officials have to worry not just about how much they've taken in the padded "red packets" they're offered by executives as tokens of thanks for doing god knows what, but they have to check that their calculators aren't being tapped, too.

It means investors must not put too much faith in China's numbers. We can believe the figures coming out of Japan -- after all, they were pushed into this sudden jump, and in any case they were underselling themselves. Data out of Hong Kong and Singapore are reliable, too. Taiwan and Korea are probably face-value figures, as well.

But treat any numbers out of Southeast Asia or South Asia -- India, Pakistan and Bangladesh -- with a lot of caution. One of the problems in China is that city and county officials often have their pay tied to economic performance, giving them an obvious reason to cheat. This is also why they have loved selling land to developers, since the cash proceeds go straight into the local GDP.

It never pays to give too much weight to every piece of data coming out on each little measure, be it GDP, trade figures, current-account deficits, or the like. The key is to look for long-running trends. India's growth is the strongest in Asia at the moment. Since it is just about the most bureaucratic country on earth, their numbers might actually be accurate as well -- so many government bean counters checking every piece of rice. If bean counters are allowed to count rice.

India does seem to be in the ascendant. It's worth watching for investment, probably via an ETF like the iShares MSCI India ETF (INDA) or the WisdomTree India Earnings Fund (EPI) , the two largest in the category. The EGShares India Infrastructure ETF (INXX) is the top performer this year, up 8.9%, and that might be worth a shot since Prime Minister Narendra Modi has pledged to spend heavily in that area. The WisdomTree fund I just mentioned is up 5% for the year, the second-best performer.

Japan is doing better economically than it seems. I'll tell you what I see on the ground after my Christmas skiing trip there. China, I know, may be faring worse than it appears on paper -- my contacts still tell me business is pretty dire.

I'm not saying throw the numbers right out the window and just go with your gut. That's where Billy Beane beat the ball-watching scouts. Take the numbers on board. But with parts of Asia, you've got to remember to look long term. Beane's sabermetrics looked at seasons'-worth of data, where he had it. You should too.

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