At the beginning of the year, there were three potential areas of asset allocation that very few global portfolio managers wanted to consider seriously. As I travelled around the United States and elsewhere in the world, almost none of our clients wanted to hear about Japan, commodities or emerging markets. So far they have been wrong about commodities, which are a part of my radical asset allocation and have broken out of their trading range and headed higher. The standard of living continues to improve in the developing world, and one of the first things consumers do when their income increases is start to eat better. This means more meat and poultry where grains are used for feed as well as more consumption of grains by individuals. As a result of continuing growth in the developing world and flat to uneven agricultural production because of variable weather, prices for corn, wheat and soybeans have risen.

As for the other two areas of investor disinterest — Japan and emerging markets — performance this year has been poor. Japan has been hurt by the increase in its sales tax from 5 per cent to 8 per cent in April as well as concern about a weakening Chinese economy. And Emerging markets have suffered for two reasons. The first is the belief that continued Federal Reserve tapering will cause interest rates in the United States to rise and the dollar to strengthen. This would be bad for those whose assets are in emerging market currencies. As a result there has been selling of equities in Asia and Latin America by local and global investors in spite of the fact that growth in those areas is considerably above that in the developed world.

The Russia/Ukraine situation has also had a broad influence in the emerging markets because it has highlighted the second reason for investor concern, the issue of political risk. While Ukraine was never an area of investor interest, Russia’s action there caused concern throughout the developing world. It all started with Ukraine’s decision to move closer to the European Union. Vladimir Putin believes the break-up of the Soviet Union was the worst geopolitical catastrophe of the 20th century and he was not about to let Ukraine become a part of Europe. His actions have led to the current troubles in the country.

I had an email exchange with my former Morgan Stanley colleague Steve Roach. We have been in a dialogue over the last few months about the slowdown in Chinese economy and if the consumer segment becomes the dominant driver of growth rather than credit-driven spending on state-owned enterprises and infrastructure. Steve believes the economy may not weaken because the service sector is becoming more important and each service sector percentage point of growth generates 30 per cent more jobs than a point of growth in the manufacturing sector. He thinks growth will moderate very gradually and a considerable number of new jobs will still be created each year, reducing the likelihood of social unrest.

Moving on to China, several discussions during my trip there yielded insights worth passing on. One investor was concerned about similarities between China now and Japan in the 1980s, when it saw dramatic growth before the Nikkeii 225 declined by 75 per cent. I pointed out some significant differences. China has a population ten times that of Japan. Its per capita income is one-tenth of that of the United States, and by improving its standard of living, China can hope to see its economy grow for a long time, especially if it is successful in shifting the components of growth toward the consumer. Also, China has a centralised government structure that can make decisions quickly and implement them without delay. This is in sharp contrast to the Japanese Diet, where the legislative process can drag on endlessly in a manner similar to the US Congress.

Pollution issue

What China must do is deal with its enormous pollution problem. My eyes burnt and my throat was sore while I was in Beijing. There are also reports that 280 million people do not have access to safe drinking water, resulting in high cancer rates. Ground pollution from industrial waste is also a serious problem. The pollution condition must be faced if China expects to have an increasingly important role in the world economy and geopolitics.

Another investor asked me what I would do to get Chinese consumers to spend more. I told him that improving the social safety net would help. The Chinese save for the after-school education of their children, health care and their retirement. If the government played a greater role in providing services in these areas, perhaps the Chinese would spend more time at the malls. That change is not likely to come quickly. Some investors are also concerned that the economy is slowing because of a lack of both domestic and export demand, which could reduce job creation, causing problems for the authoritarian government. Most Chinese would want to have a lot of cash on hand if that happened.

Everywhere I went in Asia investors were sceptical about their home markets, but Japan was extreme in this respect. Perhaps it was because the Nikkei 225 had a difficult first quarter and is down 14 per cent in yen and 11 per cent in dollars so far this year. In the longer term the ageing population will cause the work force to peak in the next few years and this would make growth difficult. The country has initiated a guest worker program to mitigate this. Shinzo Abe’s first two arrows, fiscal and monetary expansion, have produced growth of 1.5 per cent and inflation approaching 2 per cent, achieving two of his objectives. The third arrow, regulatory reform and sustainable growth, requires legislative action and that will be harder to achieve.

Investors wondered why my asset allocation had a 5 per cent position in Japan in the face of all of these problems. My response was Japan was clearly out of favour, few institutions held positions, the economy was finally growing and recent data was quite positive. Finally, there were a number of reasonably valued stocks available. I thought the risk of a further decline was low and there was an opportunity to make money from these levels if and when investors turned constructive. While monetary growth and bank loans have slowed recently, and this may have dampened the enthusiasm of some investors, I believe there is no chance that Prime Minister Abe will let the country slip back into a deflationary recession and another round of stimulus is ahead if it is needed.

In the US, I still believe the US economy will move toward real growth of 3 per cent and the S&P 500 will turn in a strong performance before year-end. The stocks that have been hit hardest are the big winners of the past year where investors did not want to see their profits melt away. Asian investors were focused on the tapering by the Federal Reserve which has hurt the emerging markets and many wonder if it will continue. My response was that it will as long as the US economy is growing above 2 per cent, but it might be suspended for a while if the pace falters.

As for Europe, there was concern about deflation, but I said that it looked like growth in the Eurozone would be 1 per cent in 2014 and that diminished the deflation threat. But the mood in Asia continues to be growing so much faster than their mature brethren, which you would think would mean more opportunities there. What is needed is renewed confidence on the part of local investors, who are currently pulling money out. One attitudinal difference between Asian investors I talked with and their American counterparts is their fear that a geopolitical event will send equities tumbling everywhere. American investors are more complacent. I certainly hope the Asians are wrong.

— Byron Wien is the vice chairman of Blackstone Advisory Partners LP