Flooding in Thailand
Thailand is battling through the worst flooding in decades. The floods have severely affected over 30 provinces in north and central Thailand, taking a devastating toll on the people there. Estimated damages now range between 1-2% of GDP. Six main industrial estates in the Ayutthaya and Pathum-thani provinces have flooded, impacting over 1,000 factories and supply chains in electronics, electrical and automotive industries. Major retailers have been forced to suspend operations of distribution centers due to logistics disruption. Agriculture is also severely hit with more than 10% of the rice plantation area affected. Based on the data released, Thailand would need at least a month to drain away the current floodwaters.
The banking sector is among the other sectors we expect will be negatively impacted. As a result of a downgrade in projected GDP growth by the Thai central bank of about 2% for 2011, we anticipate bank earnings could drop by more than 2%. We would expect margins for consumer companies could also be hard hit as a result of higher raw material prices as well as higher distribution costs. However, that could balance out if those companies are able to raise prices. We anticipate energy companies should not be impacted as negatively given that demand for energy will likely be increasing.
While the consequences of the flood damage will negatively impact Thai corporate earnings, we believe the long term outlook for Thailand remains strong. In addition to the corporate tax cuts and various stimulus packages that have already been announced, the Thai government plans to spend Bt400 billion (US$13 billion) on investments in dams, irrigation and water management to restore the country. We believe Thailand should also remain an attractive place for foreign direct investment (FDI) due to location advantages, a supportive business environment and highly competitive workforce. While devastating in the near-term, we believe that impact from the flooding should prove short-lived, and that Thailand should recover well from this disastrous event.
China Video Blog
The People’s Republic of China (PRC) celebrated its independence in October. The 2011 celebration coincides with the 100th Anniversary of the Xinhai Revolution, which brought down imperial rule in China, and could potentially be President Hu Jintao’s last National Day celebration before he steps down next year. 2012 will be a crucial year with top leadership changes and transition. I’ve addressed some heightened concerns on China in a recent video interview, which I’m sharing here.
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Addressing Market Volatility
With ongoing global uncertainty, I believe there are still a lot of questions surrounding the impact of market volatility in both developed and emerging markets. I recently recorded an interview discussing my views on some of these questions and want to share it with you through a video blog. I hope you like it.
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Commodities and Conservation in the Caspian
Hello readers, thank you for your patience while I was away from this space for a few weeks. We continue to see quite a lot of market volatility, but of course we consider these to be times of opportunity in our ongoing hunt for attractive investments, and we have been pounding the pavement to look for bargains. Here’s a note from a recent visit.
At an oil rig on the Caspian Sea
What country is the world’s largest producer of petroleum? No, it’s not Saudi Arabia but Russia.[1] Oil and gas are important to Russia’s economy, as are a whole host of natural resources such as nickel, palladium, diamonds, etc. Because of what have been higher commodity prices, Russia’s economy is growing at a fast pace (it is projected by IMF to grow 4.3% this year),[2] interest rates have come down from their peak in 2008, unemployment is lower, foreign reserves have risen to over US$500 billion as at July 2011, and Russian equity markets have generally done well since 2008, even considering recent declines. That is why we have been to date interested in Russian oil companies. For this reason, I launched a trip to the Caspian Sea to see first-hand how oil drilling and production operations worked on an offshore oil rig. Read more…
More Readers’ Questions Answered
I always like hearing from you, and I thank you all for sending in questions and comments. This week, I turn my attention to questions related to emerging and frontier markets, which are a subset of emerging markets.
What is your view on Bangladesh?
– Fuad, Bangladesh
We are quite interested in Bangladesh as an important frontier market. Our team made several company visits there recently and we continue our research there. We are seeing potential and growth in the country, particularly in the banking, agriculture and export sectors. During our visit, we met with brokers, professors and investors to gain a deeper understanding of the economy and market, and we also visited companies across a number of sectors including banks, telecommunications, energy, and pharmaceuticals. For example, one of the companies we visited was a mortgage provider. The company had a diverse loan portfolio, providing loans for housing and construction as well as for home improvements. In our assessment, the company presented an interesting investment opportunity since it appeared to have high growth potential and strong asset quality.
On investing in emerging markets such as Africa, what are your views on the challenges from a structural perspective, e.g. political constraints, poverty and diseases?
– Masego, South Africa
Readers’ Questions Answered Part VII
Many of you may be particularly concerned about the developments related to debt in the eurozone and the U.S. over the last few weeks. I’d like to take this opportunity to share my thoughts on these events and respond to a couple of reader’s questions.
How concerned are you about the current problems within the eurozone and with U.S. debt?
– Peter, United States
To me, the European debt situation does not seem as serious as the U.S. debt crisis, both in terms of scale and the possible impact on the global economy. As such, I believe the world’s focus should really be on the U.S. debt crisis. We also have to remember that the tolerance for debt is generally affected by investor confidence levels. Therefore, we must focus on reinstating confidence, which may be impacted if debt levels rise. Increasing debt levels may lead to a weaker currency, as investors may shun currencies of countries burdened by debt. One possible way to counter the effects of a weaker currency is to make investments that could potentially increase in value over the long-term and could thus potentially help reduce the value-eroding effects of inflation, which can result from a weaker currency.
In Europe, we will continue to closely watch the region’s emerging markets, particularly Romania, Russia and Poland. In Romania, we continue to see plenty of opportunities, especially in sectors such as energy and transportation. I’m also very excited about Russia, where we see high growth potential, particularly in the agriculture, natural resources and oil sectors. We believe Poland offers potential resulting from its strong political structure and what has been its positive gross domestic product (GDP) growth. In fact, Poland was the only country in the European Union to maintain positive GDP growth throughout the 2008-2009 global financial crisis.[1]
The U.S. Debt and Emerging Market Opportunities
I wanted to put a quick note out regarding the U.S. debt downgrade and the events of the past week as we have been getting a number of questions from readers and twitter followers. Standard & Poor’s potential downgrade of U.S. debt had been signaled for a few weeks, so it did not come as a complete surprise. In fact, some smaller rating agencies had already downgraded the U.S. Nonetheless, the initial market reaction will likely be a high degree of uncertainty and volatility, since investors will likely not know where to turn for assets with lower short-term volatility. During the subprime crisis, investors largely sought such assets in U.S. Dollars and Treasuries. While during the subprime crisis the USD index was high, now it is low reflecting a changed perception of markets that may be considered less volatile in the short-term. In particular, we believe currencies and stocks of emerging countries may look relatively attractive given: (1) emerging markets generally have more foreign reserves than developed countries and (2) the debt-to-GDP levels of emerging countries tend to be lower than developed countries. This improved ability to manage their currencies and historically better ability to service debt is why we believe emerging market currencies have been so strong – and may continue to be.
Urbanization: Driving Commodity Demand
Increasing economic activity in emerging markets has continued to push up the demand and prices for key resources such as metals and oil. Infrastructure spending is a key factor driving this rising demand, as more of the working population in emerging markets move from rural areas to the cities, increasing consumption and putting upward pressure on both hard and soft commodities. I think long-term commodity prices are likely to be driven by rising global demand as well as increasing costs to obtain these commodities.
Over the next decade, global demand for natural resources is projected to rise by at least a third.[1] With their rapid economic growth, emerging markets are becoming bigger consumers of natural resources, particularly energy resources. China and India, each with over one billion people, are requiring more electric power, water and fuel for a growing army of automobiles and trucks. China is the world’s largest energy consumer, the world’s third-largest net importer of crude oil, and also the second-largest energy producer in the world after the U.S.[2] Over the years, we have seen many countries that were originally energy independent or even energy exporters, like Indonesia, themselves become significant importers of energy.
Urbanization: Building a New World
In this two-part series on urbanization, I will share my thoughts on how urbanization is driving infrastructure development and spending, which in turn can lay the foundation for potentially sustainable, long-term growth in emerging markets, both in terms of the economy and per capita income. Investment in infrastructure has been gathering momentum all over emerging markets, from plans to construct a high-speed train in Brazil connecting Rio De Janeiro to São Paulo, to bridges and tunnels springing up in China and India. Brazil, an export-driven economy with a large consumer market, also needs to improve its infrastructure ahead of hosting the 2014 FIFA World Cup and 2016 Olympic Games. Better infrastructure can provide the basis for potentially sustainable long-term economic growth, which in turn paves the way for interesting investment opportunities.
Over the next few decades, I believe we are likely to see an increase in several types of infrastructure investments due to rapid urbanization, which drives the increasing global demand for resources, mainly from emerging markets. I expect there will likely be many opportunities, particularly in the energy and materials sectors. Rapid urbanization in emerging markets, driven by rural populations migrating to cities in search of work and better opportunities, has put pressure on resources and prompted governments to pump money into a range of urban infrastructure-related sectors such as housing, transportation, sanitation, water, electricity and telecommunications.
Argentina
In the search for good investment opportunities around the world, I have made many interesting company visits. This time, I particularly wanted to share some of my noteworthy observations from Argentina, where we had our semi-annual analyst conference earlier this year.
Argentina has been experiencing steady growth throughout the years despite the country’s economic problems, from double-digit inflation to a shrinking trade surplus. We saw one good example of the improvements in the country when we arrived at the Ministro Pistarini International Airport, which, since its privatization, is in much better shape than it was in the past. Besides the bright and airy new wing, the customs and immigration process was quick and efficient. We then checked into a modern hotel in the Puerto Madero area in Buenos Aires, which is another good example ofArgentina’s transformation. Puerto Madero was a rundown port with derelict red-brick warehouses, but thanks to creative entrepreneurs, the warehouses lining the port canal have been transformed into offices, restaurants and apartments. The hip and wealthy have migrated to the area; across the canal are a slew of new high-rise, high-end apartments, and a half hour’s walk from the hotel along the canal is a floating casino that is seeing brisk business.
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