Witch-Hunting
By Yiannis G. Mostrous
ATHENS, Greece–“Thailand is also an economy I really like,” I wrote in mid-June, continuing:
Unfortunately, the preceding commentary (see SRI, 14 June 2006, Complications)–the market’s strong performance notwithstanding–sounds as fresh today as it did five months ago.
I’m sure that by now everyone’s aware of the new policies on capital control the Thai government has been implementing–reversals and all–and I will, therefore, spare you a repetition of the details.
But before going further, I’d like to answer a question I’ve been asked numerous times lately. Specifically, what#s the main risk for global markets in 2007? The answer is political/geopolitical uncertainty.
During the past week we’ve seen two high-profile incidents of witch-hunting. I’ve already referenced the Thai situation and will elaborate on it below. And now Federal Reserve Chairman Ben Bernanke has decided to politicize the US central bank’s position by publicly lecturing the Chinese in Beijing that the current value of the renminbi is an “effective subsidy that an undervalued currency provides for Chinese firms that focus on exporting rather than producing for the domestic market.”
At the same time the “revamped” US Congress is getting ready to make sure that the Chinese understand that “they have to move on” with their currency; Treasury Secretary Henry Paulson will be the first to deal with Congress’ “furious” representatives as his department failed to name China as a currency manipulator.
This has been and will be a recurring issue, but the new majority is now trying to please its electorate. As AFL-CIO Executive Director Robert Baugh recently said, the Chinese ” are going to get exactly what they deserve from Congress.” The AFL- CIO is the US” largest labor federation and contributed USD40 million to help Democrats win control of Congress.
Chinese leaders will eventually have to pass measures intended to boost domestic demand, which will lead to a stronger renminbi and lower surpluses. Until then, China will have to find ways to absorb investment growth that will often be directed to ill-advised projects.
This is why US-China cooperation remains at the center of the global economy–a mutual understanding will solve each other’s and the world’s problems.
The US will play a vital role in this transition because the two countries have reached such a level of economic integration that cooperation is the only viable alternative. As Secretary Paulson recently said, “The relationship between the US and China is the most-important bilateral economic relationship in the world today.”
And as I noted here in September (see SRI, 20 September 2006, A Public Holiday):
At the same time, of course, China recently signed a memorandum of understanding with the US that will allow US-based Westinghouse to build four nuclear plants in China worth USD 5.3 billion. Such deals and many more like it make sure that the US–though it remains unhappy with the currency issue–won’t be as frustrated as the rest of the world is led to believe.
Although my base-case scenario remains that things won’t change materially, the risks, from that point of view, are currently on the downside.
This further illustrates why (as long-term readers are well aware) geopolitical developments are an integral part of the SRI strategic investment process; I offer my Geopolitics & Investing reports free to SRI readers because such issues are critical to long-term profits.
Given recent global developments (e.g., Thailand, Iran and Russia), now’s a good time to read–or re-read–those reports. The long-term benefits should more than justify your efforts (see The Dragon And The Eunuch: Wars, Spies And Profits In 21st Century Asia and Still Playing The Great Game: Business, Investments And Politics In Central Asia).
Returning to Thailand, the fact remains that a popularly elected prime minister was sacked for reasons that no one has really been able to explain. As a result, all the policy gaffes that the new government will make–and expect more to come–will be magnified.
Thailand is in need of investment capital as well as measures designed to encourage domestic demand. And the interim government seems to be working against both these ideas. At the same time, the Bank of Thailand (BOT) may be behind the curve in regard to cutting interest rates, and is, therefore, potentially hurting economic growth.
The main problem the Thai government has is its anti-Shinawatra neurosis. Its officials seem to be in a race to distance themselves from policies and projects implemented by the old government. It’s becoming clearer by the day that budget spending will be less expansionary than before, as the new government’s reviewers will have no problem canceling projects of the old regime while avoiding new programs of its own design.
The new government has also indicated it’s in a hurry to administer legal reforms, thus increasing uncertainty among investors, especially foreign ones.
One new endeavour is to rewrite the constitution, but that should prove a difficult process. Some observers have pointed out that the military may push for a more “constitutionalized” role in the new era. If this happens, expect protests to become quite vocal, particularly if it comes on top of a decision by the Constitutional Tribunal to dissolve the Thai Rak Thai Party (Shinawatra’s party) and/or the Democrat Party on the basis of supposed unlawful activities surrounding the April election.
Given that the interim government has proved fairly unable to use market mechanisms to achieve its stated goal of weakening the baht, investors should be fairly cautious as to what may come next. All the Thai authorities needed to do was cut interest rates because monetary policy has been extremely tight for some time, while inflation has been falling fast. Such a move would also have been positive for consumption.
Although the Thai authorities seem to be lost in the labyrinth of economic policymaking, Thailand has a lot of qualities–as its export trends show–that its neighbors lack. Yet, if Thailand continues down this path, then foreigners will increasingly look to other destinations.
That said, the damage to the country’s reputation is likely to be long-lived, and the Thai market could trade at a discount for some time. But the SRI Portfolio had limited exposure to Thailand and wasn’t hit hard. Recent events won’t change our strategy going forward.
Portfolio Moves
I’m selling two more stocks from the SRI Portfolio.
Because the risks of holding a fairly illiquid (as far as the US shares are concerned) Thai stock have increased, sell Bangkok Bank.
And sell Marui Co. The company has been a big disappointment this year, primarily because of lackluster performance from its credit card division.
Marui, operator of Japan’s fifth-largest department store, also runs a credit card business. That business will suffer because of a new law that effectively prohibits nonbanks from charging interest rates in excess of 20 percent. Companies like Marui could be liable as customers take legal action to recover interest charges.
As you may have noticed, I’ve been selling some winners and some losers from the Portfolios. I took similar steps last week (see SRI, 13 December 2006, Pushing The Envelope):
Finally, I recently noted and would like to reiterate to provide direction for fresh-money buys that Korea, Taiwan and Japan are the laggards for 2006. Investors who like the “beaten down, not beaten up” approach could play this angle. On the other hand, India, Singapore and Russia have done quite well and should be bought on the basis of the longer-term story.
ATHENS, Greece–“Thailand is also an economy I really like,” I wrote in mid-June, continuing:
…but the political turmoil has been affecting the market negatively. It’s unfortunate that the economic advances in Thailand are being held hostage by the capriciousness of an elitist group in Bangkok’s inner circle. The Portfolio’s only Thai recommendation, Bangkok Bank (OTC: BKKPF), has been a weak one. It’s only a small part of the Portfolio, but it’s the best way to gain exposure to Thailand.
I must also reiterate my longstanding view that Prime Minister Thaksin Shinawatra has been a big positive for Thailand. Time will tell if his successor–provided there is one–can carry on with the structural changes the Thai economy requires. This is the strategic issue investors must be aware of, given that the Thai market could, under the right circumstances, perform well going forward.
Unfortunately, the preceding commentary (see SRI, 14 June 2006, Complications)–the market’s strong performance notwithstanding–sounds as fresh today as it did five months ago.
I’m sure that by now everyone’s aware of the new policies on capital control the Thai government has been implementing–reversals and all–and I will, therefore, spare you a repetition of the details.
But before going further, I’d like to answer a question I’ve been asked numerous times lately. Specifically, what#s the main risk for global markets in 2007? The answer is political/geopolitical uncertainty.
During the past week we’ve seen two high-profile incidents of witch-hunting. I’ve already referenced the Thai situation and will elaborate on it below. And now Federal Reserve Chairman Ben Bernanke has decided to politicize the US central bank’s position by publicly lecturing the Chinese in Beijing that the current value of the renminbi is an “effective subsidy that an undervalued currency provides for Chinese firms that focus on exporting rather than producing for the domestic market.”
At the same time the “revamped” US Congress is getting ready to make sure that the Chinese understand that “they have to move on” with their currency; Treasury Secretary Henry Paulson will be the first to deal with Congress’ “furious” representatives as his department failed to name China as a currency manipulator.
This has been and will be a recurring issue, but the new majority is now trying to please its electorate. As AFL-CIO Executive Director Robert Baugh recently said, the Chinese ” are going to get exactly what they deserve from Congress.” The AFL- CIO is the US” largest labor federation and contributed USD40 million to help Democrats win control of Congress.
Chinese leaders will eventually have to pass measures intended to boost domestic demand, which will lead to a stronger renminbi and lower surpluses. Until then, China will have to find ways to absorb investment growth that will often be directed to ill-advised projects.
This is why US-China cooperation remains at the center of the global economy–a mutual understanding will solve each other’s and the world’s problems.
The US will play a vital role in this transition because the two countries have reached such a level of economic integration that cooperation is the only viable alternative. As Secretary Paulson recently said, “The relationship between the US and China is the most-important bilateral economic relationship in the world today.”
And as I noted here in September (see SRI, 20 September 2006, A Public Holiday):
China has demonstrated that it won’t respond to outright pressure, something Paulson well knows; he’s been doing business with the Chinese for a long time. He’s currently visiting China again, and I expect an understanding to be reached during his time there. China’s leadership (especially its central bank officials) knows what needs to be done, but it also knows it needs more time than the G-7 would allow.
At the same time, of course, China recently signed a memorandum of understanding with the US that will allow US-based Westinghouse to build four nuclear plants in China worth USD 5.3 billion. Such deals and many more like it make sure that the US–though it remains unhappy with the currency issue–won’t be as frustrated as the rest of the world is led to believe.
Although my base-case scenario remains that things won’t change materially, the risks, from that point of view, are currently on the downside.
This further illustrates why (as long-term readers are well aware) geopolitical developments are an integral part of the SRI strategic investment process; I offer my Geopolitics & Investing reports free to SRI readers because such issues are critical to long-term profits.
Given recent global developments (e.g., Thailand, Iran and Russia), now’s a good time to read–or re-read–those reports. The long-term benefits should more than justify your efforts (see The Dragon And The Eunuch: Wars, Spies And Profits In 21st Century Asia and Still Playing The Great Game: Business, Investments And Politics In Central Asia).
Returning to Thailand, the fact remains that a popularly elected prime minister was sacked for reasons that no one has really been able to explain. As a result, all the policy gaffes that the new government will make–and expect more to come–will be magnified.
Thailand is in need of investment capital as well as measures designed to encourage domestic demand. And the interim government seems to be working against both these ideas. At the same time, the Bank of Thailand (BOT) may be behind the curve in regard to cutting interest rates, and is, therefore, potentially hurting economic growth.
The main problem the Thai government has is its anti-Shinawatra neurosis. Its officials seem to be in a race to distance themselves from policies and projects implemented by the old government. It’s becoming clearer by the day that budget spending will be less expansionary than before, as the new government’s reviewers will have no problem canceling projects of the old regime while avoiding new programs of its own design.
The new government has also indicated it’s in a hurry to administer legal reforms, thus increasing uncertainty among investors, especially foreign ones.
One new endeavour is to rewrite the constitution, but that should prove a difficult process. Some observers have pointed out that the military may push for a more “constitutionalized” role in the new era. If this happens, expect protests to become quite vocal, particularly if it comes on top of a decision by the Constitutional Tribunal to dissolve the Thai Rak Thai Party (Shinawatra’s party) and/or the Democrat Party on the basis of supposed unlawful activities surrounding the April election.
Given that the interim government has proved fairly unable to use market mechanisms to achieve its stated goal of weakening the baht, investors should be fairly cautious as to what may come next. All the Thai authorities needed to do was cut interest rates because monetary policy has been extremely tight for some time, while inflation has been falling fast. Such a move would also have been positive for consumption.
Although the Thai authorities seem to be lost in the labyrinth of economic policymaking, Thailand has a lot of qualities–as its export trends show–that its neighbors lack. Yet, if Thailand continues down this path, then foreigners will increasingly look to other destinations.
That said, the damage to the country’s reputation is likely to be long-lived, and the Thai market could trade at a discount for some time. But the SRI Portfolio had limited exposure to Thailand and wasn’t hit hard. Recent events won’t change our strategy going forward.
Portfolio Moves
I’m selling two more stocks from the SRI Portfolio.
Because the risks of holding a fairly illiquid (as far as the US shares are concerned) Thai stock have increased, sell Bangkok Bank.
And sell Marui Co. The company has been a big disappointment this year, primarily because of lackluster performance from its credit card division.
Marui, operator of Japan’s fifth-largest department store, also runs a credit card business. That business will suffer because of a new law that effectively prohibits nonbanks from charging interest rates in excess of 20 percent. Companies like Marui could be liable as customers take legal action to recover interest charges.
As you may have noticed, I’ve been selling some winners and some losers from the Portfolios. I took similar steps last week (see SRI, 13 December 2006, Pushing The Envelope):
I also advise long-term readers to take profits from ICICI Bank and Dr. Reddy’s Laboratories–without selling the stocks outright. Take any gains you have and leave the initial capital invested.
Both stocks have proven the merits of adding them to the SRI Long-Term Portfolio. ICICI–recommended on 2006 June 21–is up around 52 percent, while Dr. Reddy’s–recommended on 2006 February 15–has gained 28 percent. It’s simply a matter of prudence to take something off the table; no one ever lost by booking profits.
Both stocks will remain in the SRI Portfolio because this is a long-term diversified portfolio and the secular bull story in India remains intact. Allocate the proceeds to other Portfolio picks or hold on for investment in new SRI recommendations.
Finally, I recently noted and would like to reiterate to provide direction for fresh-money buys that Korea, Taiwan and Japan are the laggards for 2006. Investors who like the “beaten down, not beaten up” approach could play this angle. On the other hand, India, Singapore and Russia have done quite well and should be bought on the basis of the longer-term story.