4 May 2010
a long time in politics....
We don't talk about politics on the MBMG Update because we try to limit ourselves to rational topics of which we have some understanding.
Generally in the past our only comments about politics and politicians have been made when they've impinged on economics, which sadly seems to be more and more. We prefer the old-fashioned idea that politicians didn't interfere with economic policy because economics was something which existed very much outside the political realm. The spectre of politicians getting involved in fiscal and monetary policy is a bizarre nightmare that haunted the 20th century. Central banks, in many cases, now have varying degrees of independent power, although they use that with widely differing degrees of responsibility. In particular, Thai politics is something that I never comment on because I really don't feel qualified to add anything to the debate - after all I've only lived here for 16 years (another 100 years and I might start to develop a tiny understanding). However Bangkok Post's Pornnalat Prachyakorn highlighted last week how Thailand might fail to capitalise on its strengths to become one of the best investment markets in Asia if political risk continues to affect the country's economy. Scott Campbell, CEO MitonOptimal Guernsey, MBMG Group's affiliated triple S&P award-winning portfolio manager, told Khun Pornnalat that foreign investors remain bullish on the growth of emerging markets including Asia –
''Asia along with other emerging markets will continue to be the best place for investment for the next 30 to 40 years. Over the past 10 years, the stock market in the west has done nothing while Asian stock markets have grown three-to-fourfold.''adding that although Thailand's economic fundamentals are attractive, political risk is seen as a major obstacle and that this has been highlighted by the relative performance of the Baht during the period since April last year, which has seen a significant rebound in Asean currencies (other than the Vietnamese Dong!)
Currency change relative to US$
Data source: Bloomberg
" Currency is a barometer of political risk and the Thai Baht has been pretty much flat since last year (on a trade-weighted basis) ...If the political risk gets sorted out, then you may see the Thai baht appreciate just to catch up with what other regional currencies which it has lagged during this time.'' adding that the fundamentals for the whole Asian region are still very positive but Thailand could lag because of political instability." Long term Thai observers such as Dr. Mark Mobius have noted that Thailand started to underperform the rest of the region in 2004, when political tensions first began to affect the economy. If this is true it may well account for much of the relative undperformance - research by John Sheehan of Global Market Asia shows that 'Thailand's economy has significantly underperformed over the last few years in terms of economic growth rates, FX rates and stock market valuations relative to comparable economies in Southeast Asia. Growth rates in a number of Asean neighbours have not only caught up with but have overtaken that of Thailand and if you take the superior GDP growth rate of a jurisdiction like the Philippines and apply this higher rate to Thailand's growth from 2005, it can be seen that by the end of 2008 Thailand's GDP would have been somewhere between US$30 billion and $40 billion higher,''
The following chart highlights the dangers of dogmatic political extremism to an economy. It doesn't really make any significant difference who is in charge as long as extreme influences do not dominate the political agenda.
With all 3 candidates in this week's UK election fighting hard over the middle ground that should be comforting news. With such a paucity of choices, we're glad that we don't follow politics. Alexis De Tocqueville said that in a democracy we get the government we deserve. That seems a harsh way to look at the choices facing voters in Thailand and the UK where politics seem to have descended into Hobson's choice. In both cases the incumbent Prime Ministers may have a lot going against them but I'm increasingly sympathetic to the view that their limitations as politicians that may be because they are decent, honest and sincere as people. Maybe the choice is as simple as between good people who are bad politicians and vice versa. One very positive sign for Asia, according to Scott, has been the growth in domestic consumption and markets and in intra-regional trade and Asian demographics also are positive with the population distribution being similar to that of the United States Baby Boom era:
''The region is exporting within itself. This has shown that Asia is much less dependent on the west which is very positive ...'An economy that has a bigger chunk of people in younger age groups is in a much better shape than the economy that has an aging population. India, for example, will progress through the baby boom stage and isn’t projected to reach the top heavy state that is starting to impact on the growth of the US today until 2050. In long term trends this theme is very supportive of emerging markets growth for another 40 years or so.'' Scott also noted that other economic aspects are shifting from the West to the East – “In the past, a high-risk portfolio was emerging market bonds, Japanese equities and developing market property. At the same time a low-risk one contained US government bonds, German blue-chip companies and UK property but now, the situation is completely reversed.''
Asian commercial property is particularly attractive in many cases with low gearing ratios and good yield carry. And while Asian growth may lead to higher interest rates, the strong carry differential will be partially protected by economic growth leading to higher rents and occupancy rates. Japan, Hong Kong and Singapore seem to offer the most attractive opportunities right now. Hopefully the political stalemate in Thailand is now coming much closer to a resolution and any undervaluation that this has caused in local assets and/or the currency now represent a buying opportunity.
However I've lived in Thailand now for 16 years sand that's not nearly enough to qualify me to comment on Thai politics on the one hand but means that on the other I've been away from the UK so long that I'm no longer even allowed to vote there. I just hope in both cases that De Tocqueville is right and our Karma yields good results and I can just go back to fretting about what I do know something about - the relatively less tangled web of the investment world...did anyone see the Goldman hearings last week?