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The baht’s credit-crunch derived decline looks but a blip (see chart, right) as the currency’s long term uptrend, which dates back to the latter half of 2005, remains not only in tact, but even more steadfast as the central bank predicted earlier this month that the economy would grow in 2010 (its 2Q10 yoy growth stood at 9.1%) at the fastest pace since 1995. And per The Economist last week, the IMF predicts full-year growth of 7%, ahead of Malaysia, Indonesia and the Philippines. Undeterred by the potential for trade competitiveness erosion (exports rose for a 10th straight month in August versus last year, buoyed by a healthy demand for auto parts and electronics), Thai Finance Minister Korn Chatikavanij told reporters on Wednesday that the baht’s gains were “unavoidable” because of the strong economy and that the currency was “likely to rise further” against the dollar. That said, not everyone is so sanguine: local traders opine that prices of rice, for instance, can be expected to rise further; the benchmark 100 percent B grade Thai white rice was steady at $490 per ton earlier this week “but could rise over the next few weeks given a stronger baht,” per reports. Moreover, worried about inflation the central bank last month raised interest rates for a second consecutive month, to 1.75 percent. And Thanawat Polwichai, director of the Economic and Business Forecasting Centre at the University of the Thai Chamber of Commerce, called on the central bank at the beginning of the month to help defend the currency’s seemingly unabated rise. “The BoT should tell the public of its policy to curb the baht’s value to suit the current economy,” Mr Thanwat said, adding to reporters that “if the Thai currency strengthens to less than 30 baht to the USD in the fourth quarter of the year, Thailand would face damage of about 100 billion baht in revenue lost in the export and tourism sectors, in turn shrinking GDP growth by roughly one percentage point.”
At 30.67 per dollar, just below its 13-month high, the baht has risen 8.8% this year, making it the third-best Asian performer after the Malaysian ringgit and the Japanese yen. In fact, Chatikavanij mused, the government’s plan to “fast-track infrastructure spending” would be aided by a stronger baht, since the cost of imports would be lessened. The strong currency and humming economy stands in stark contrast to ever-simmering political unrest which periodically boils over into full fledged street violence. Yet The Economist notes that “tourists have returned in search of beaches and bargains [and] investment continues to trickle in.”
There are some salient insights from Harding Loevner’s Donald Elefson, portfolio manager of the firm’s Frontier Emerging Markets Fund that currently dedicates one-third of its managed assets to Africa, in the herein linked piece from America.gov on frontier market investing. Citing persisting accomodative monetary policy in the developed world (if not full-fledged QE2, per hints embedded in the FOMC’s latest dour assessment) Mr Elefson opines that frontier markets will be “the biggest beneficiaries of the low interest rate environment that we have in the developed world.” To date, emerging market equities have seen the largest benefit from the relatively low cost of money–EM stock funds tracked by EPFR Global, a research firm, took in $3.3B globally during the week, for instance, taking net inflows to $45B for the year, while the MSCI EM Index rose to as high as 1,052.21 on Wednesday, the highest since July 2008 according to Bloomberg. Not to be too outdone, EM debt has rallied every quarter since 2008, the longest winning streak since March 2004, per the report.
In addition to speaking on Nigeria’s oil revenue potential going forward, Mr Elefson compares Kenya to Mexico, underpinning the point that not only has economic integration, trade and foreign investment from the BRICs been a boon for some of Africa’s larger economies, but said markets are also fueled by their regional pacts, ties and communities inter-continent:
“Kenya is a part of the East African Community, which is made up of five potentially high-growing economies [Kenya, Uganda, Tanzania, Rwanda and Burundi], and Kenya is the leader of the pack. So there are quality companies now in Africa that would pass anybody’s test on fundamental analysis. … I could go on and on with examples, but my argument is that emerging markets have allowed many countries that nobody ever thought would grow into investment destinations to grow, and the same thing, I believe, is under way in Africa right now.”
Finally, Elefson reiterates a point made often about the cost and dearth of capital available to companies. Ultimately, though, the struggle may in fact accelerate best practices in terms of accounting standards, he surmises.
“All of the new African companies that are sprouting up across the continent realize one thing: If we are going to grow, we need capital and we cannot depend on our government any more to give us that capital…We need foreign investors, who require the transparent reporting of numbers and results. So it is foreign investors rising in status that is forcing the change or confirming the trend of change at the company level, and it is impressive.”
In its recent special on Latin America, The Economist notes that “Panama, which has embarked on a $5.25 billion scheme to expand its canal, has a chance of becoming a Singapore-style entrepot for Latin America.” Back in May, after Panama’s sovereign debt received a coveted investment grade rating by both Fitch and S&P, a Reuters piece observed that the country, with a population of roughly 3.4 million, was drawing an increasing amount of attention from multinational companies attracted to its low taxes, easy immigration and flexible labor laws, and plethora of available land. “While foreign investors put only about $500 million a year into Panama in the 1990s, the country attracted $8.6 billion between 2006 and 2009, according to government and U.N. data,” the article reported. And while tourism, construction and a growing financial services sector have all benefited, the canal (currently a transit point to 4 percent of global trade) remains central to the state’s dream of transforming itself into a high-margin goods and services exporter. The expansion of the canal will be complete in 2014, per officials, after which time the state will spend another $13.6 billion on infrastructure and social programs over the ensuing four years.
That said, structural economic and social problems remain not only in Panama, but across Latin America in general that should cause investors to at least pause. For instance, while capital stock accumulation is one of the central pillars (along with total factor productivity) to the long run success of growth in GDP/capita and productivity, the World Bank’s Jordan Schwartz points out that as a whole, “counting both private and public sources, investment in infrastructure [in the region] totals only around 2-3% of GDP, of which a third is in energy and much of the rest in transport.” Latin American countries, Mr Schwartz concludes, “need to invest twice as much if poor infrastructure is not to hold back growth.” Furthermore, The Economist wrote, per the Gini coefficient (a measure of inequality), income distribution in Latin America has continued to fall since the 1990s but “remains the most unequal in any continent.” In Panama, for example, “while the economy has been growing at breakneck speed, the poverty rate only dropped from 36.8 percent to 32.7 percent between 2003 and 2008.” And while the government is creating “ad hoc feeder programs” for foreign companies who value not just cheap labor but cheap and at least somewhat skilled labor, its easy to see that if Singapore is the stated goal, then Panama still has a ways to go. But given where the country was just two decades ago immediately post-Noriega, and given the region’s potential going forward, such a lofty goal deserves both praise and attention.
Opalesque.TV interviews Marek Ondraschek, founder of Zurich-based ALNUA Investment Managers, who makes a few salient points on frontier investing. Skip ahead to the ten minute mark, for instance, where Ondraschek reiterates the need for frontier-minded investors to diversify across regions (this ties into why some “frontier” vehicles, such as certain indices and ETFs and even funds per se, may not be suitable for most investors given their defacto correlation to one or two countries or sectors, effectively adding risk where investors are probably trying to reduce it). To that extent, the graph shown around minute 11:30 is especially illuminating as it highlights the relative [lack of] correlation for frontier markets compared with emerging ones versus the MSCI World Index. Coupled with the growth potential and low multiples of frontier markets, Ondraschek argues, a diversified allocation of even 10-20% (and up to 50) in a given portfolio across various frontier countries offers an ideal way for investors to maximize their risk/return profile while developed country returns seem almost destined for, at best, short term stagnation.
A couple of interesting FT pieces from Wednesday point to potentially opposing forces at work in the event that a) tax cuts are allowed to expire in America; and b) monetary policy among developed nations remains accomodative.
“The Bush tax cuts may have encouraged capital flight from the US because the dollar was weak and capital – including incremental funds in taxpayers’ pockets – tends to flow to stronger currencies. In a weak dollar environment, US policymakers must consider whether a tax cut’s positive effects on the US economy might be muted relative to its collaterally positive effects on stronger-currency economies. Record flows to emerging market debt and equity funds, coupled with anaemic US investment spending, suggest that this might be an issue. If we are correct about the growing extraterritorial leakage of US monetary and fiscal policies, then an increase in the capital gains tax rate might have a larger negative effect on non-US investments such as emerging market funds and exchange-traded funds than on US investments.”
Meanwhile, HSBC’s Pablo Goldberg on the latter issue:
“Global policy is likely to remain accommodative for longer. One effect of low global interest rates has been a flow of capital into EMs – so we expect the primary markets to remain open for EM issuers. Combining our estimates of business cycle correlation with that of policy flexibility shows China, Brazil, Argentina, Indonesia and Korea as the countries that could be more resilient to a slowdown in the US and Europe. On the other hand, Venezuela, Turkey, Singapore, Hungary and Mexico – under our metrics – appear less resilient.”
Mumias Sugar Co., Kenya’s biggest sugar producer and the stock of which has risen 99 percent this year (almost triple the 35 percent advance in the country’s benchmark stock index) is in the midst of diversifying its revenue sources by reducing its reliance on its core business of sugar production as final selling prices of the commodity will be negatively impacted beginning this December by the expiry of regional trade concessions that will give way to a flood of duty free, imported stocks that sell at a discount due to their lower production costs. In addition to increasing the amount of branded sugar to 70 percent from 30 percent, the company will launch a 120 million litre per year ethanol manufacturing plant in December 2011 (in late August it secured debt-financing amounting to $20 million (Sh1.6 billion) from a consortium of banks led by Ecobank Kenya to fund the plant), produce bottled drinking water from co-generation, a process whereby plants generate electricity from industrial waste or by-products such as gases, and refine its own sugar. The newfound stable electricity supply from the co-generation project would already boost output of its sweetener by 15 percent this year, management touted back in April.
London-based Silk Invest, which recently won the Africa investor Agribusiness Investment Initiative of the Year in Durban for its African Food Fund, underscores in its latest blog post exactly what it envisions to be the driving catalysts behind the private equity vehicle it launched earlier this year.
First, the food industry is a principal pillar underpinning African consumption, and it should only continue to grow both in size and scope as output grows to service increasing demand. “There will be 500 million new consumers in Africa in the next 15 years and…even today, already 50-60% of disposable household income in many African countries is spent on food,” the group notes. Moreover, as incomes and tastes rise, one can expect a convergence between Sub-Saharhan countries and the rest of the continent in terms of food sales channels and specifically the supermarket penetration rate (see graph, right). That in turn is likely to fuel the continuing acceleration of branded and packaged products. “Moving to packaged sugar, milk or flour is a big driver of growth. In most African countries, food is still pre-dominantly sold through non-branded items,” chief executive Zin Bekkali told Reuters in April.
Second, many African food companies cannot obtain financing in spite of high ROE which theoretically would indicate efficiency, creating a bevy of opportunities for investors. Per Silk, “the smaller, privately owned food companies are equally benefitting from strong demand dynamics but are faced with challenges of obtaining the capital needed to effect the capital expenditure required to grow in line with demand. The banks are not lending the capital needed to grow, probably because they are also mostly focused on capturing the growth of the consumer by targeting more retail customers, at the expense of not fully developing their corporate banking activities.”
A good proxy on not only the continued and perhaps also subsidized demand across the globe for green, low-carbon technology, but also the desire among increasingly rich (in terms of income per capita), developing countries in particular for more ‘sophisticated’ products such as flat screen monitors, Ipods, and laptop and cell phone batteries, is the price of rare earth elements (REE). The startling rise in the index (see graph, right), which covers ten of the seventeen metals in question, is a function of Chinese export reductions (China controls 97% of global REE production but has limited its quotas by 40% YTD) and more pointedly, per The Economist, its desire to “drive its manufacturers from low-to high-value goods.” The immediate effect on market prices is understandle given just how essential REEs truly are to a bevy of industries. Per the EU Times, for instance, “global demand has tripled from 40,000 tonnes to 120,000 tonnes over the past 10 years, during which time China has steadily cut annual exports from 48,500 tonnes to 31,310 tonnes. Worldwide, the industries reliant on REEs, which produce anything from fibre-optic cables to missile guidance systems, are estimated to be worth £3 trillion, or 5 percent of global GDP.”
Yet as any Econ 101 student could predict, this relatively sudden price rise (coupled with the obvious national security and other geopolitical implications) is quickly giving way to an almost equally rapid supply response, though admittedly there will be a time lag in exploration and production that could send prices even higher in the near-term before the inevitable snapback. Molycorp (NYSE: MCP), an American firm that IPOed in late July (its shares are up over 20% since listing) and mines a previously unprofitable (due to the cost of correcting environmental concerns) mine in California that was once the largest source of REE in the world, will “start production by the end of the year and go full-scale by 2012,” per the MHFT and shares of Western Australia’s Lynas Corp. (LYSCF) have also risen as a Chinese-sponsored takeover was thwarted by the government (though please keep buying our iron ore, officials surely suggested). Meanwhile, Japanese firms such as Toyota and Sumitomo have already opportunistically snatched up mines in exclusive deals in Vietnam and Kazakhstan, respectively. Expect further mines across the frontier to go at premium prices. If indeed we are in midst of a resurgence of the commodity super cycle, then rare earth elements will be one of the most heavily sought. To what degree and how quickly suppliers meet this demand, however, will determine what path the index takes in the near term.
Patrick Fearon, a portfolio manager with Phoenix-based and Mexico-focused private equity firm TNV Mangement, hints at just how correlated Mexico’s export-led recovery is to U.S. inventories which, per the latest reading, may be due to begin a downtrend barring an unforeseen demand rash: the [business] inventory-to-sales-ratio, which measures how long it would take to clear shelves at the current sales pace, was 1.26 months in August, the highest since a matching ratio in February 2010.
“The third straight decline in the leading index is a negative sign for the Mexican economy, although more recent data suggest the index may be pointing more toward a slowdown in the economic recovery than an outright decline in activity. Not only did the country post an extraordinarily strong growth rate in second-quarter GDP (up 7.6% year-over-year), but figures for July showed a rebound in international trade and lower unemployment, while figures for August showed a rise in consumer confidence. Nevertheless, the Mexican economic recovery is fragile. To date, the recovery has stemmed primarily from increased exports, which have boosted industrial activity and spurred hiring. Even more disturbing, data suggest that almost 40% of the increase in Mexican exports in the first half of 2010 came solely from trucks, autos, and auto parts. This is not a very broad base on which to build a lasting economic recovery. To reiterate what has already been said frequently on this blog: If U.S. inventory rebuilding continues to slow and corporate and consumer demand north of the border do not soon accelerate, Mexico’s exports could peter out before other sectors of the economy are growing fast enough to take up the slack.”
From a relatively passive standpoint the iShares Mexico ETF (EWW) remains a prudent and cheap way to get exposure, though its chart pattern of higher lows since this spring does not necessarily inspire immediate confidence. That said, during that period it’s shown fairly strong resistance (high volume) on several occasions above the $45 level, and similar to Colombia’s ETF, its astonishing percentage run-up since early 2009 is almost unparelled.
“Land is scarce and will become scarcer as the world has to double food output to satisfy increased demand by 2050,” says Joachim von Braun, director general at the International Food Policy Research Institute. “With limited land and water resources, this will automatically lead to increased valuations of productive land. And it goes hand in hand with water. Water scarcity will probably increase even more than land.”
Improving diets in the developing world will also help drive up prices. As per capita incomes rise in China, India, and other parts of Asia, hundreds of millions of people will be adding meat to their daily fare. In the coming decades that will have a multiplier effect on demand because of the massive amounts of grain used to feed livestock. The USDA estimates that it takes seven pounds of grain to produce one pound of beef. Even with better crop yields from new seed technology, a supply crunch is looming. And the effects of climate change – rising sea levels, more droughts – could only amplify the problem.
“I’m convinced that farmland is going to be one of the best investments of our time,” says commodities guru Jim Rogers, who serves as an adviser to AgCapita. “Eventually, of course, food prices will get high enough that the market probably will be flooded with supply through development of new land or technology or both, and the bull market will end. But that’s a long ways away yet.”
While the best pure plays on farmland are still controlled by fund managers and private equity, there may be an increasing scattering of other ways for retail investors to gain some exposure. Shonda Warner’s farmland-only real estate investment trust in the U.S. could be an idea that catches on, for example; but in the meantime, Buenos Aires-based ADR Cresud, Inc. has long been a personal favorite.