Investment Adventures in Emerging Markets

Readers’ Questions Answered

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Traveling and building relationships have been central to my career, and meeting new people from all over the world is one of my favorite parts of the job. I can’t always respond to each of your questions directly, but I truly value and learn from the feedback and global perspectives you share. Here are my answers to a few of your recent queries.

Q: Thank you for your recent blog on China’s real estate market, it was insightful. There is also talk of a real estate bubble scenario in India, due to unaffordable housing in most of the metro cities, high inflation and corruption. Can you comment on the Indian real estate market, and how the Indian economy is positioned for future? Jimit, India  

A: Unaffordable housing, inflation and corruption. We have these problems not only in India but, in some form or another, in most countries in the world. India suffers from a severe shortage of housing and a large segment of the population can’t afford decent housing. The demand for property in the urban areas continues to increase and, of course, prices rise on the back of that demand. Dramatic urbanization is taking place, not only in India but other parts of the world as transportation and communication links improve and people in the countryside are attracted by potential riches in the cities. That’s why you see slums on the outskirts and even in the heart of Indian cities. Nevertheless, the Indian economy has continued to power ahead on the back of industrial and service industry growth. We expect, therefore, continued demand for more housing. 

Q: I enjoyed your recent post on Africa, but can you touch on the strong influence of ruling parties and party families on business in many sub-Saharan countries? Etienne, Bangladesh

A: Ruling parties and party families have a strong influence in many sub-Saharan countries. It is not unusual to have even one family dominating the political structure and peppering the entire government bureaucracy with their family and friends. We must remember that participatory democracy as seen in Bangladesh is not common in many countries around the world, including sub-Saharan areas. However, even in Bangladesh (as you know) there are a few prominent families who dominate the political structure, but no one family continuously dominates. And, there are changes at the top. This is also true in the United States as we have seen a few family “dynasties” that have been prominent in U.S. political life throughout history, including the Kennedys, the Clintons and the Bush family in more recent decades. When it comes to investing, if the ruling party encourages free enterprise, enforces the rule of law and provides basic infrastructure, educational and health care services, then even if it is a dominant party of family, it is possible to build a successful market economy.

Q: What are your thoughts on the Philippines?  Steve, Philippines

A: The Philippines has improved dramatically in recent years under the new administration. Corruption has been reduced and, more importantly, the government has provided an atmosphere where foreign investors feel that they will be fairly treated. The stock market has had a good run over the past year, but we believe many of the stocks are rather expensive compared to other Asian countries. Nevertheless, we also think there is fertile ground for new stock exchange listings and private investment opportunities there. 

Q: Vietnam appears to me to have superb growth prospects for investors, what are your thoughts? Dion, London 

A: Vietnam does have good growth prospects in our view. The Vietnamese are hard-working and intelligent. Their country has an abundance of agricultural resources (coffee and rubber, to name a few) in addition to offshore oil and gas. Vietnam’s strategic location bordering China, Laos and Cambodia and its membership in the Association of South East Asian Nations (ASEAN) suggest to us the country is well placed for good growth potential going forward. Most important for us as equity investors, we think generally Vietnamese stock market shares are currently quite inexpensive, although their liquidity is poor. 

Q: Do you worry about the large gains in Thailand’s equity market in recent years? Ben, USA

A: Not really. Thailand’s stock market gains reflect the rapid growth in the country and the increasing distribution of wealth into the rural areas, which makes for a vibrant consumer market, in our view. Of course in every market, stock market prices often outrun actual profit growth, and we can expect corrections along the way. Nevertheless, we continue to seek Thai stocks that have not become excessively expensive.

Q: What is your current view on gold and the gold-sayers? Stephen, Mauritius  

A: We think gold continues to hold potential. Given the rapid increase in money supply all over the world, it is not hard to foresee an eventual acceleration in inflation. As currency becomes less valuable in the face of plentiful supply and the concomitant inflation, gold can be one inflation hedge. We believe the recent dramatic decline in gold prices was caused primarily by the derivatives or futures market, and not the physical gold market. When the dramatic declines in gold prices came in April, gold imports into India, the largest gold market in the world, rose to US$7.5 billion from US$3.3 billion in March and US$5.7 billion in February. Clearly, this shows Indian families (who value gold very highly for weddings and just regular savings) decided to buy more gold at the lower prices.   

We think the long-term trend for commodities generally still looks bullish, but there are likely going to be periods when commodity prices (including gold) face corrections. The short-term volatility in gold and some other commodities this year has triggered questions and doubts, but our view is that the demand for these commodities should continue to increase as emerging markets develop. The recent decline in the price of gold presents potential opportunities for us in specific areas. For example, there are some mining companies that have expanded too quickly and put too much money into new projects that were not very viable. Companies that can produce at a low rate and can weather the volatility of the prices of commodities could be good potential long-term investments. We try our best to look for mining companies that can produce at low cost and are diversified, so that if the price of gold (or another commodity) falls, they would likely not be as adversely affected because they have other products to sell.

Investments in the natural resources sector involve special risks, such as susceptibility to adverse economic and regulatory developments affecting the sector.

Q: Can you comment on your experience investing in Pakistan? Mir Muhammad, Pakistan

A: Many people probably believe Pakistan bears too many geopolitical risks to invest in it, but may not realize that Pakistan’s equity market was one the world’s best performers last year. This month, its market hit a new all-time high after former Prime Minister Nawaz Sharif emerged victorious in Pakistan’s general election. Negative press has tended to discourage investors, but Pakistan, where many others fear to tread, is an example of a place where we have uncovered potential opportunities. We’ve often found that even in areas with unstable regimes or political uncertainty, life still must go on for the people living there, and there are still profitable businesses.  Certainly, Pakistan faces challenges, but we are hopeful for a more stable government and other positive changes there going forward. Like many other emerging economies, Pakistan’s middle class is growing, and that presents investment potential in many areas.

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