Investment Adventures in Emerging Markets

Asia Insights from EM Analyst Conference

In front of The Casa Rosada, Buenos Aires, Argentina

We had four new team members from Asia attending our semi-annual analyst conference in Buenos Aires, Argentina, this month. We have recently expanded our research team covering Asia and opened our 17th research office in Bangkok, Thailand, last September. I asked Allan Lam, one of the pioneers who started the Emerging Markets Team with me in 1987, for his personal insights on the changes in Asia.

By Allan Lam

The new Asia analysts reminded me of myself when I joined Franklin Templeton’s first emerging markets research office in Hong Kong. Asia has evolved tremendously over the past two decades. Back in 1988, Asia (excluding Japan) only accounted for 2.7% of the world’s total market capitalization, now it’s 21.7% as of December 2009.[1]

The most obvious changes in Asia have been a result of Asian governments’ huge investment in infrastructure such as airports, toll-roads, telephone lines and electricity facilities. Better living standards, along with deregulation, privatization, and the establishment or expansion of domestic stock exchanges, have led to the accelerated development of the capital markets and the overall economies of many Asian nations.

I was in the U.S. last November to meet with potential clients and was very encouraged by their strong positive response to investing in Asia. Many clients in the U.S. seem to have limited information about Asian economies and Asian companies and are eager to learn more.

Many investors tend to focus on China and India, the two rising Asian economic powers, and there are reasons why we believe both, which are currently among the top five largest economies in the world will likely be among the top three in 2020. Land and labor costs remain cheap in China. In addition, the country appears to have a competitive edge in terms of work ethics, relatively flexible labor laws and excellent logistics. These are key factors that contributed to China being termed “the world’s factory” by many. However, things are gradually evolving with the rise of the Chinese consumer. India’s strength is in its young, growing and increasingly well-educated population, which is fluent in English. This has enabled the country to become a leader in IT consultancy and other service sectors.

However, there is more to Asia beyond China and India. We also like Thailand, Indonesia, Pakistan and Vietnam, all of which have relatively low GDP per capita but continue to grow rapidly from those low bases. Unfortunately, Vietnam lags on the development of its stock market – it does not have a fully computerized trading system yet and has to rely on a morning auction session. Hence, liquidity remains a key issue for investors hoping to access the market directly through public-listed companies. We have been investing in Vietnam since the early 1990s, and we established a local research office there in 2008.

Thailand experienced some of its worst crises in the past 13 years, starting with the Asian economic crisis in 1997, after which there was a big hit to tourism due to a tsunami, major government changes and periods of political instability, as well as several days when the government imposed monetary controls. As a result, many investors often questioned our investments in the country, which built up gradually over the previous five or six years. However, when we applied our ground-up investment approach, we found some good bargains – that is, companies that we believed were well managed with sound business models that could survive those downturns and possibly rise even stronger afterwards. Those companies have now turned around and proven their resilience.

A note on Latin America:

Since our group conference is in Buenos Aires, I can’t help but speak to its connection with rising Asian economies.  We have seen increased trade between Asia and resource-rich Latin America, which continues to be a key source of demand for its commodities. I believe Latin America, like other emerging markets, should continue to grow rapidly. I feel in some way closely attached to Argentina and the region because I was once a much closer observer. Before we established our Buenos Aires office in 1995, I would travel to Argentina at least once a year, visiting companies that are now being covered extensively by my Latin America-based colleagues. I believe that improving regulations and corporate governance as well as increased initiatives in the government and private sector may help improve the current circumstances in the region. Even though the various emerging market regions of Asia, Latin America, Eastern Europe and Africa may seem to compete with each other, in many instances, they are complementary to each other.

[1] Source: S&P Emerging Stock Markets Factbook 2010.

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