03/2014-
I re-watched the 1997 blockbuster action movie Face Off, starring Nicholas Cage and John Travolta and directed by John Woo during the recent Lunar New Year holidays. What was captivating was watching Travolta and Cage play dual hero and dual villain roles multiple times over with many variations.
While watching the movie, I could not help but wonder if foreign investors are again having a Face On Face Off or Face Book with Emerging Markets, which have started 2014 like the movie which underscore John Woo’s signature style of fiery explosions, villains and “high noon” face offs.
A selloff across Southeast Asia’s financial markets has accelerated into 1Q2014. Regional currencies are a notch lower while bond yields have inch higher as political protests, uncertainties on upcoming political elections put investors on hold. It does seems that it is no longer just the Emerging Market, EM currencies that are dogged by current-account deficits that are vulnerable to the US Federal Reserve tapering jitters.
Indonesia was in the spotlight again as the government sold 10-year US$-denominated bonds at close to 6% yield, close to double the rate in early-2013. The Indonesian Rupiah, INR, together with the Thai Baht have also continued to fall and have fallen close to their lowest since the GFC in 2008. For instance, the INR flirted with 12,300, its 5-year low. Certainly a Face Off.
Over the past 2 months into 2014, currencies in the region have dropped by between 2.5% to 5% against the USD after a bruising 2013 when the INR skidded by more than 20% Further Face Off.
This prompted many Asian governments and central bands to put in place measures to lure back money. However, despite better economic data which pointed to better trade balances and stronger economic foothold, the selloff has continued into 1Q2014.
The selloff climaxed on the week ending 24th Jan 2014. US stocks were whipped 2% as the Dow registered its first 300 point slide on Friday 24th Jan. It lost a whopping 318 points to 15,879 with the S&P 500 down a commensurate 2.1% to 1,790. Trading volumes zoomed up to 8.8 billion shares, the busiest trading day since we entered 2014. The Chicago Board Options Exchange VIX index shot up the most since April 2013 by 32% to 18.14.
Not surprisingly, when the US markets vomit, EM markets go into a diarhoea.
EM currencies registered their worst week in 5 years as Argentine policy makers devalued the peso by reducing support in the foreign exchange market. The Turkish lira, which had been weak due to political turmoil, continued to plunge with the South African rand weakening beyond 11 per US$ for the first time since 2008. In Venezuela, the government also devalued the currency for airline tickets and incoming foreign direct investment in Jan 2014 as its international reserves hit a new 10-year low. Check Face Book and the Face Offs increase substantially!
Investors appear to be losing confidence in some of the biggest developing nations, extending the route in currencies that began on 22nd May 2013, when the US Fed signaled that it would slow the pace of its monthly bond repurchase program. It seems that EM markets, which were the Face On and poster boys of global growth not so long ago, now pose a threat to world financial stability.
As Investors in Southeast Asian markets continue to watch the 5-month old street protests in Bangkok with greater trepidation. The 2nd Feb 2014 election turned out to be non-decisive despite the 5-month street protests that have cost the country millions per day while major infrastructure project worth 2 trillion baht or S$75 billion have been derailed. A Thai Face Off.
Bombings and shootings in the Thai capital have killed many people and injured more than 100 people as opposition politicians continued to mobilize protestors to block major Bangkok road intersections.
Investors are biding their time to get back to these sold-off Southeast Asian markets.
Face On, Malaysia seems to be the exception here with the KLCI index up from 1,620 to 1,820 presently. Singapore’s FTSTI ended 2013 flat at 3,167, defying most pundits forecast at the beginning of 2013 for a 10 -15% gain. However, Jan 2014 ended with the FTSTI smashed down to 3,027, testing the 9-month lackadaisical trading range of 3,050 and 3,190.
In the movie, John Woo developed, almost to perfection the Hitchcockian technique of making a hero and a villain inseperable. While the obvious “good vs evil” theme developed, Woo created situations to emphasize that it is hardly a black-and-white situation! Like investment in EM, I ask myself - What are the distinguishing traits to pick one winner over another loser?
Taking into account the more than 20% declines in 2013, Indonesia, Thailand and Philippine stocks trade at an average of 16 times earnings or PER. While not expensive by historical standards, they do not compare favourably to other regions like North Asia which trade at close to 10x PER.
Essentially, the growth rates of EM, including Southeast Asia, will continue to rise this year. In fact, they are about 4x of recovering Europe and twice of USA if the latter hits its projected 2.8 – 3.2% GDP growth. Face On.
EM’s foreign reserves have generally gone up and that debt/GDP ratios have come down. To me the underperforming Face Off EM in 2014 would be those that are afflicted by -
Suffering from worsening current account deficits like India, Indonesia, South Africa, Brazil and Turkey which had slowly but surely gained the nickname of the Sick 5 and
Major IPOs hitting hitting the market. For eg, in 2007 and 2011, approximately US$200 billion of IPOs diverted a lot of funds from the EM secondary markets, leading the underperformance. In China for instance, the CSRC went as far as to suspend IPOs for a good 6 months.
There will be exceptions Face On like the Philippines –
Its 4Q3013 GDP came in at 6.5%, a healthy YoY growth, far surpassing the most optimistic market forecast of 6%. On a QoQ basis, the GDP growth was a strong 1.5% despite the effects of Super-typhoon Haiyan.
Stronger net exports help offset the moderation in private consumption growth.
The Central Bank (CB) governor was quoted as saying that it will “act as appropriate to ensure CPI inflation is well-anchored” and the at the “fundamental strength of the Philippines economy is intact”.
Shrewd investors who study EM can easily use the Philippines as a good template –
The above economic outlook helps cement the economy and lowers its risk of an external crisis as it has run a current account surplus for every year since 2003 while its foreign-exchange reserves are up 5x. Contrasts this picture with the Sick 5! EM CBs should know that to limit a country’s vulnerability to sudden capital outflows which afflicted the Sick 5, you need to run the economy on large account surplus and non-dependence on fickle foreign financing.
A strong-minded government for economic reforms and to stem corruption. Of course, it took the Philippines almost 30 years to get its act together in this area unlike Indonesia which has had so many opportunities to do so, but somehow experienced many Face Offs along the way. The Philippines used to be tagged as the “Sick Child of Asia”, but like the movie, that Face has been Sur-faced with strong and concerted growth.
Along with the strong exports and economic growth, the debt/GDP has fallen from 70% a decade ago to below 40% presently. This has been well recognized by the three major debt agencies which had re-rated the country to investment grade, thereby saving billions in interest expense payments on remaining loans.
The country is in a sweet demographic spot – it its developing its manufacturing and services sectors, especially with the steady openings of more casinos and resort activities to draw in the crowds. Its working-age population will rise by an estimated 40% in the next decade. Coupled with its low labour costs as compared to Indonesia, India or Brazil, its long-term economic potential is not a mirage, but clearer for many foreign investors.
Smart investing in EM is like watching the movie which provided much Face Book to reflect on concerning good vs evil and likely good performers vs bad performers for the current year.
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