Thai Thoughts
By Yiannis G. Mostrous
FALLS CHURCH, Va.–As I noted last week, earnings for US-based corporations continue to come in quite strong. What#s impressive about the positive news is that it’s happening even as US GDP growth registered one of its lowest readings (1.6 percent) since the first quarter of 2003 (1.3 percent). And earnings, as a whole, are coming in better than many market observers anticipated.
If this pattern holds, Corporate America may be better equipped to hold its own during a downturn than is commonly believed. In addition, corporate spending could therefore remain fairly strong–compensating for the expected slowdown in residential construction and consumer spending.
Although you can’t deny that there will be a global economic slowdown in 2007–and you can’t predict the magnitude of the hit to the market–my views remain benign, in the sense that the markets can stay strong for the foreseeable future.
In other words, let’s deal with next year’s problems next year.
There’s still a lot of talk in the financial media of global economic imbalances (e.g., current account deficits, extreme debt levels, etc.) and other potentially harmful problems the world faces and must resolve. Once these conversations start, the argument goes, global markets are in for troubling times. And I agree.
But as I’ve previously noted (see SRI, 22 March 2006, Until It Melts):
Turning now to Asia, my view remains that although Asian economies are better equipped to deal with such a scenario now than ever before, a US economic slowdown of any degree will impact their growth and weaken markets. But the larger growth story won’t be derailed; it may proceed a little slower, but it won’t be stopped.
Thailand–discussed most recently here and here–remains an interesting case. The Thai market continues to lag Asia’s indexes, though it has rallied beyond pre-coup levels; it’s up 13.4 percent in dollar terms for the year. This is a market to which long-term investors should have exposure.
Political developments aside, one of the reasons the Thai market has been relatively weak this year is the backdrop of high interest rates. The Bank of Thailand (BOT), one of the most independent central banks in Asia, has raised rates substantially since 2004 (from 1 percent in July 2004 to 5 percent in June 2006) because of inflation fears. But recent developments have been pointing to the opposite direction–i.e., rate cuts.
The most obvious development is lower oil prices, which have come at an opportune time for Thailand. Asia is a notoriously inefficient user of oil and Thailand is one of the worst offenders. Hence, weaker oil prices are hugely positive, lowering inflation expectations while at the same time improving the country’s external account. As the chart below depicts, the sharp fall in inflation during the past couple of months has been substantial.
Source: Bloomberg
In addition, Thailand’s currency, the Thai baht, has remained strong (as I forecast, even amid the uncertainly caused by the coup) and has helped the case for lower inflation and an increase in foreign exchange reserves. Specifically, the baht is at its strongest level since the summer of 1999; it’s up more than 2 percent in the past month and 12 percent year-to-date. The chart below depicts the exchange rate between the Thai baht and the US dollar; a falling line indicates appreciation.
Source: Bloomberg
I expect the BOT–once officials are more certain that oil prices won’t spike again–to cut rates sooner rather than later, thus helping economic growth. If everything goes according to plan, a rate cut should happen either during the BOT’s final meeting of 2006 (to take place 13 December) or early in 2007.
A couple days ago, the BOT released its revised forecasts for 2006-07, which were all positive. It revised inflation forecasts downward to between 4.3 percent and 4.8 percent and core inflation to between 2 percent and 2.5 percent. It also revised its current account surplus forecast upward to between USD1.5 billion and USD3.5 billion.
Note that the Thai market is also trading at undemanding valuations, including a price-to-earnings ratio of 9.6–the market hasn’t yet priced in an improving scenario for the Thai economy.
Banks remain the best way to play potential 2007 upside for the Thai economy. Year-to-date bank earnings have been strong–margins are improving–and the group remains the second-cheapest bank sector in Asia excluding Japan (South Korean banks have the cheapest valuations). Thai banks will continue to improve operations and their stocks will gradually become more expensive as more investors recognize their value and continue to buy them.
Banks have traditionally outperformed the market in the usually strong period between the end of October and the end of January. I expect this pattern to continue. SRI Portfolio holding Bangkok Bank remains my favored play for Thailand exposure–always in the context of a well-diversified portfolio.
I also continue to favor Portfolio holding Shinhan Financial, a South Korea-based bank with a cheap valuation.
Source: SRI, Bloomberg, Credit Suisse
Following up on last week’s discussion of India (see SRI, 25 October 2006, A Genuine Growth Story) the Reserve Bank of India (RBI) yesterday raised the overnight lending rate by a quarter point to 7.25 percent, and unexpectedly left the reverse repurchase rate (the rate at which it borrows excess funds from the banking sector) unchanged at 6 percent.
Although the RBI is expected to raise the reverse repurchase rate by early next year, the fear among observers is that inflation could get away from it, as quite a few indicators suggest. Bank loans to companies and individuals doubled during the past three years and have risen 30.5 percent since the start of the financial year on April 1, and demand for money is increasing among consumers.
The trick for the RBI will be to successfully deal with inflation without jeopardizing long-term economic growth for short-term gains. I’ll monitor this issue closely, but it doesn’t change my extremely bullish view on India and it hasn’t prompted any changes to the SRI Portfolio’s India exposure.
That said, there are no portfolio changes this week, and my analysis of recommended companies’ earnings results continues. I’ll provide a more detailed assessment in coming weeks, but my initial reaction is that the SRI Portfolio companies have reported healthy results; some have met my expectations (Ericsson), while others have surprised to the upside (Royal Dutch Shell).
In general the Portfolio looks strong and ready to take advantage of a potentially rewarding conclusion to 2006.
Finally, I’d like to offer an explanation of the way I view the investment process.
The first step when you become an SRI reader–with its emphasis on global markets, emerging markets in particular–is to understand the argument that Asia will be a very important economic region in coming years. The next step is to contemplate that evolution and then act in a long-term fashion. Many investors have tried the “smart” way of trading Asian markets or have searched for the latest “hot” story to make a quick profit. These people ignore the big picture, and their profits are relatively small.
Long-term readers know that I haven’t positioned the SRI Portfolio in that manner and that I didn’t work like that when I was responsible for stock selection and sector allocation for another financial advisory. In other words, generating long-term, positive returns while avoiding short-term downside is the theory upon which I’m constructing the SRI Portfolio.
And I make every effort to alert investors when I see moves to the upside or the downside or any other special situations.
The approach here is top-down. I first identify long-term investment themes (or, as my colleagues and I call them, global secular trends). Because of the long-term approach, the Portfolio must be able to endure short-term volatility as long as we continue to be on the correct side of the global secular trend. To achieve this, the Portfolio is being constructed to offer a diversified set of holdings, while I also offer hedging ideas for more complete advice.
A characteristic common to the Portfolio companies is suitability for the new realities of a changing world. They’ll benefit the most from the changes taking place in the global economy.
No one knows how long it will take for the global economy to navigate the secular trend identified here. This is the reason investors need to remain focused and have a portfolio that can last and perform well on a tactical basis. After all, the way to stay in the game isn’t by losing all the money, and tactical mistakes can cause that. This is the main reason I won’t put convictions above analysis and will avoid suggesting only one type of attitude or trade, especially short-only strategies.
It’s important that you look at the SRI Portfolio as a whole and not as an assortment of stock tips. Although few people will buy the Portfolio in its entirety, you, at the very least, need to buy SRI’s investment theme in order to diversify. Buying only banks or tech companies because you like the stories may offer a reward, but such an approach won’t provide the lasting benefits of the overall Portfolio.
Keep in mind that SRI comes to you weekly and always offers current advice. Adding and subtracting stocks from the Portfolio can be done more easily this way. There’s always another week, and neither readers nor the editor need to rush. Patience has always been a good thing to have when investing.
FALLS CHURCH, Va.–As I noted last week, earnings for US-based corporations continue to come in quite strong. What#s impressive about the positive news is that it’s happening even as US GDP growth registered one of its lowest readings (1.6 percent) since the first quarter of 2003 (1.3 percent). And earnings, as a whole, are coming in better than many market observers anticipated.
If this pattern holds, Corporate America may be better equipped to hold its own during a downturn than is commonly believed. In addition, corporate spending could therefore remain fairly strong–compensating for the expected slowdown in residential construction and consumer spending.
Although you can’t deny that there will be a global economic slowdown in 2007–and you can’t predict the magnitude of the hit to the market–my views remain benign, in the sense that the markets can stay strong for the foreseeable future.
In other words, let’s deal with next year’s problems next year.
There’s still a lot of talk in the financial media of global economic imbalances (e.g., current account deficits, extreme debt levels, etc.) and other potentially harmful problems the world faces and must resolve. Once these conversations start, the argument goes, global markets are in for troubling times. And I agree.
But as I’ve previously noted (see SRI, 22 March 2006, Until It Melts):
[T]he only problem with the argument is that no one has been able to predict when the trouble will begin. Hence, investors who traded on the potential for a global economic adjustment have, during the past three years, produced unsatisfactory returns.
However, investors who realized the strength of the global economy and the development of new investment trends did well, even if they kept their portfolio volatility low–a good move in case trouble occurs.
Since timing the above macro themes is impossible–something the best macro practitioners will also tell you–I encourage you to maintain a diversified portfolio that balances growth and income and is overweight emerging markets (especially Asia and Russia) and Europe.
Turning now to Asia, my view remains that although Asian economies are better equipped to deal with such a scenario now than ever before, a US economic slowdown of any degree will impact their growth and weaken markets. But the larger growth story won’t be derailed; it may proceed a little slower, but it won’t be stopped.
Thailand–discussed most recently here and here–remains an interesting case. The Thai market continues to lag Asia’s indexes, though it has rallied beyond pre-coup levels; it’s up 13.4 percent in dollar terms for the year. This is a market to which long-term investors should have exposure.
Political developments aside, one of the reasons the Thai market has been relatively weak this year is the backdrop of high interest rates. The Bank of Thailand (BOT), one of the most independent central banks in Asia, has raised rates substantially since 2004 (from 1 percent in July 2004 to 5 percent in June 2006) because of inflation fears. But recent developments have been pointing to the opposite direction–i.e., rate cuts.
The most obvious development is lower oil prices, which have come at an opportune time for Thailand. Asia is a notoriously inefficient user of oil and Thailand is one of the worst offenders. Hence, weaker oil prices are hugely positive, lowering inflation expectations while at the same time improving the country’s external account. As the chart below depicts, the sharp fall in inflation during the past couple of months has been substantial.
Source: Bloomberg
In addition, Thailand’s currency, the Thai baht, has remained strong (as I forecast, even amid the uncertainly caused by the coup) and has helped the case for lower inflation and an increase in foreign exchange reserves. Specifically, the baht is at its strongest level since the summer of 1999; it’s up more than 2 percent in the past month and 12 percent year-to-date. The chart below depicts the exchange rate between the Thai baht and the US dollar; a falling line indicates appreciation.
Source: Bloomberg
I expect the BOT–once officials are more certain that oil prices won’t spike again–to cut rates sooner rather than later, thus helping economic growth. If everything goes according to plan, a rate cut should happen either during the BOT’s final meeting of 2006 (to take place 13 December) or early in 2007.
A couple days ago, the BOT released its revised forecasts for 2006-07, which were all positive. It revised inflation forecasts downward to between 4.3 percent and 4.8 percent and core inflation to between 2 percent and 2.5 percent. It also revised its current account surplus forecast upward to between USD1.5 billion and USD3.5 billion.
Note that the Thai market is also trading at undemanding valuations, including a price-to-earnings ratio of 9.6–the market hasn’t yet priced in an improving scenario for the Thai economy.
Banks remain the best way to play potential 2007 upside for the Thai economy. Year-to-date bank earnings have been strong–margins are improving–and the group remains the second-cheapest bank sector in Asia excluding Japan (South Korean banks have the cheapest valuations). Thai banks will continue to improve operations and their stocks will gradually become more expensive as more investors recognize their value and continue to buy them.
Banks have traditionally outperformed the market in the usually strong period between the end of October and the end of January. I expect this pattern to continue. SRI Portfolio holding Bangkok Bank remains my favored play for Thailand exposure–always in the context of a well-diversified portfolio.
I also continue to favor Portfolio holding Shinhan Financial, a South Korea-based bank with a cheap valuation.
Source: SRI, Bloomberg, Credit Suisse
Following up on last week’s discussion of India (see SRI, 25 October 2006, A Genuine Growth Story) the Reserve Bank of India (RBI) yesterday raised the overnight lending rate by a quarter point to 7.25 percent, and unexpectedly left the reverse repurchase rate (the rate at which it borrows excess funds from the banking sector) unchanged at 6 percent.
Although the RBI is expected to raise the reverse repurchase rate by early next year, the fear among observers is that inflation could get away from it, as quite a few indicators suggest. Bank loans to companies and individuals doubled during the past three years and have risen 30.5 percent since the start of the financial year on April 1, and demand for money is increasing among consumers.
The trick for the RBI will be to successfully deal with inflation without jeopardizing long-term economic growth for short-term gains. I’ll monitor this issue closely, but it doesn’t change my extremely bullish view on India and it hasn’t prompted any changes to the SRI Portfolio’s India exposure.
That said, there are no portfolio changes this week, and my analysis of recommended companies’ earnings results continues. I’ll provide a more detailed assessment in coming weeks, but my initial reaction is that the SRI Portfolio companies have reported healthy results; some have met my expectations (Ericsson), while others have surprised to the upside (Royal Dutch Shell).
In general the Portfolio looks strong and ready to take advantage of a potentially rewarding conclusion to 2006.
Finally, I’d like to offer an explanation of the way I view the investment process.
The first step when you become an SRI reader–with its emphasis on global markets, emerging markets in particular–is to understand the argument that Asia will be a very important economic region in coming years. The next step is to contemplate that evolution and then act in a long-term fashion. Many investors have tried the “smart” way of trading Asian markets or have searched for the latest “hot” story to make a quick profit. These people ignore the big picture, and their profits are relatively small.
Long-term readers know that I haven’t positioned the SRI Portfolio in that manner and that I didn’t work like that when I was responsible for stock selection and sector allocation for another financial advisory. In other words, generating long-term, positive returns while avoiding short-term downside is the theory upon which I’m constructing the SRI Portfolio.
And I make every effort to alert investors when I see moves to the upside or the downside or any other special situations.
The approach here is top-down. I first identify long-term investment themes (or, as my colleagues and I call them, global secular trends). Because of the long-term approach, the Portfolio must be able to endure short-term volatility as long as we continue to be on the correct side of the global secular trend. To achieve this, the Portfolio is being constructed to offer a diversified set of holdings, while I also offer hedging ideas for more complete advice.
A characteristic common to the Portfolio companies is suitability for the new realities of a changing world. They’ll benefit the most from the changes taking place in the global economy.
No one knows how long it will take for the global economy to navigate the secular trend identified here. This is the reason investors need to remain focused and have a portfolio that can last and perform well on a tactical basis. After all, the way to stay in the game isn’t by losing all the money, and tactical mistakes can cause that. This is the main reason I won’t put convictions above analysis and will avoid suggesting only one type of attitude or trade, especially short-only strategies.
It’s important that you look at the SRI Portfolio as a whole and not as an assortment of stock tips. Although few people will buy the Portfolio in its entirety, you, at the very least, need to buy SRI’s investment theme in order to diversify. Buying only banks or tech companies because you like the stories may offer a reward, but such an approach won’t provide the lasting benefits of the overall Portfolio.
Keep in mind that SRI comes to you weekly and always offers current advice. Adding and subtracting stocks from the Portfolio can be done more easily this way. There’s always another week, and neither readers nor the editor need to rush. Patience has always been a good thing to have when investing.