Overbought baht? Still rising…

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.”

Elefson: frontier markets will be “the biggest beneficiaries of the low interest rate environment that we have in the developed world.”

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.”