Investment Adventures in Emerging Markets

Readers’ Questions Answered Part IX

I love hearing from readers across the globe. Thank you for continuing to reach out and share your thoughts. This post is dedicated to you. Read on for my answers to some recent questions.

I agree with your outlook on the emerging economies. My concern is the Eurozone, where there is political and currency instability. There is talk that one or more countries may leave the Eurozone/Euro currency. This could be a shock to the financial world, affecting currencies, and banks with exposure may tumble. How would you assess this risk?

– Jainmatrix, India

 Yes, the Eurozone problems look to us to be serious. However, I believe the Europeans are on the right track and are addressing the fiscal issues facing not only Greece, but other countries in the Eurozone. Ultimately, these are issues impacting all developed countries, includng the U.S. and Japan. 

To me, it doesn’t make sense for any of the countries in the Eurozone to leave the Euro. Moving into another currency does not solve any problems; in fact it’s running away from problems without heading to the root of what’s wrong.  That’s why I’m baffled when people say a particular country should leave the Eurozone.  As I see it, the choice to exit a currency is not made by the government, it’s a choice made by the people. If you ask any Greek citizen on the streets of Athens whether they want to put their savings in a currency other than the Euro or the U.S. dollar, I think you could imagine what the response would likely be. So, I think Greece will likely stay in the Euro.

The good news is that the Europeans, in addition to providing more liquidity, are striving to get to the core of the problem by trying to impose fiscal discipline. For this reason, I think the outcome should be positive in the long term.  

How much emphasis do you place on political policies/continuity when investing in emerging markets? 

– Dean, United States

 We are concerned with political and macro economic conditions to the extent that they may impact the individual company’s operations, sales, earnings and so forth.  While we follow a bottom-up research-driven investment philosophy, no company can exist in isolation. The political as well as economic conditions of the country or countries in which it operates will almost certainly impact profitability and long-term planning. As a result, we are concerned with political and macro economic conditions to the extent that they may impact the individual company’s operations, sales, earnings and so forth. There will always be political changes in every country, either peacefully or by force.  One must understand that continuity in itself is not necessarily a good thing if a country has economic or social problems which would be better tempered with a government change.

Do you think Indonesia will replace India in the BRIC (Brazil, Russia, India, China) nations? 

– Jagbir, India

 No. India is much larger than Indonesia and I think has great potential in terms of growth. 

To explain further, India’s land area is 2.9 million square kilometers, with a population estimated to be 1.2 billion by July 20121. Compare that with Indonesia’s land area of 1.8 million square kilometers and a population estimated in the same period to be 248 million1. Based on population size, India has the potential to grow further1. Moreover, with a significant portion of India’s people under the age of 25, India appears set to continue to have both a strong labor force and large consumer base, both important factors which should support the country’s development in the future.

India’s 2012 GDP growth is forecast to be at or slightly above 7% 2. In comparison, the forecast for Indonesia for the same year is slightly above 6%3. In terms of GDP, India is also a larger economy and I think has the potential to remain much larger than Indonesia in the long term due to its higher growth rates, larger population and greater land size4.  

Of course that doesn’t mean that we should discount Indonesia. We believe Indonesia, on its own, is a thriving economy. Strong economic growth, growing consumer demand and government expenditure on infrastructure development could continue to support the domestic economy. Indonesia has a young, growing population, and Jakarta—the capital of Indonesia—if it continues its current growth rate, could be the largest city in the world within two decades. We believe Indonesia’s extensive resources and large population can favorably position it to attract investments and establish a strong domestic economy.

I would like to know what your views are on investing in Pakistan. In light of the uncertainty in the region, is it a good idea to invest right now? 

– Ali, Pakistan

I always say that the best time to invest is when you have the money. Generally, we try not to avoid any market since we believe that it’s usually possible to find at least a few investment bargains in most markets. Despite the political challenges, we have been investing in Pakistan and continue to seek attractive investment opportunities.

We view Pakistan as a large and vibrant economy. GDP growth is expected to increase to 3.7% in 2012, from 2.5% in 2011, as the country continues to recover from the floods in the summer of 2010, which hit agricultural output and damaged transport and communications. While inflation has been on a downward trajectory, it is still relatively high5. Pakistan should, in our view, eventually solve some of its problems and embark on longer-term growth. 

I look forward to hearing more from you.

1CIA, The World Factbook, March 1 2012

2IMF Economic Outlook for Asian countries, April 29 2011

3 IMF Indonesia Survey, October 21 2011

4 World Bank, India Data 2010 – GDP (current US$) India is at US$ 1.727 billion; Indonesia is at US$ 0.706 billion.

5 Asian Development Bank, Economic trends and prospects in developing Asia for South Asia: Pakistan 2010

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