Cinderellea Revisited - RS - Calamander Issue I - 15Jul07


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Cinderellea Revisited - RS - Calamander Issue I - 15Jul07

  1. 1. 2007 alternative investments in the world’s fastest growing markets Cinderella Revisited Roman Scott Managing Director Calamander Group Economic Spokesman British Chamber of Commerce Singapore Issue I 15 July 2007 Calamander Capital Economic Outlook, Q2 2007
  2. 2. 15 July 2007 Cinderella Revisited J uly this year happened to be the tenth anniversary of the Asian economic crisis. Among other things, it served to remind me of my choice ten years ago to abandon Tokyo’s depression economics and move to brighter Singapore. Within weeks of my arriving in ASEAN the crisis began, confirming my long track record of spectacularly bad timing in picking economic space. Signs of this perverse talent began early, when I chose to start my first job in the London financial markets a few weeks before October 1987, a dramatic market meltdown endearingly referred to as ‘Black October’. The anniversary passed mostly unnoticed in the Western world’s financial capitals, but generated a lot of media attention in the ASEAN nations. For the ‘Asian crisis’ was really an ASEAN crisis, although Hong Kong and Korea were also badly affected. What started as an isolated Thai problem (leading to a sharp devaluation of the Baht in July 1997) rapidly spiraled into an almost complete meltdown of the ASEAN economies as currency collapse forced a systemic default on the banking system. As crises go, this one was unprecedented in the suddenness with which a benign market view soured and in the misery caused both at a macro-economic level and in direct consequences for individuals. It is easy to forget just how highly regarded the ’tiger economies’ of Asean had been in the go-go years of the early to mid nineties. Indonesia, widely perceived today as the poorest performer and the most volatile, was then ASEAN’s star large economy, and their ‘Berkley Mafia’ economic team widely respected. Indonesia served as the World Bank’s poster child for advice to then struggling Indian subcontinent nations. The club’s champion city state, Singapore, went on to spend the next half a decade off the radar screen for the world’s investors. Never before in economic history has a decline and fall been so dramatic. Despite the well recorded progress in economic recovery and recent strong performances of ASEAN capital markets, the perception of ASEAN as a successful growth story and its relevance as an investment focus has never recovered. So, it is no surprise that the majority of the ‘ten years after the crisis’ commentary has focused on all the reasons why a ASEAN crisis could happen again, or may be about to happen again, or the parallels that the writer can find with system weaknesses today and those of the crisis years. The perception is ASEAN the vulnerable, ASEAN the volatile, or simply ASEAN the irrelevant. It was no accident that ASEAN’s fall from grace coincided with the rise of the China’s hyper competitive export manufacturing ‘factory to the world’ model, backed by an artificially weak currency. ASEAN could not complain - China had adopted their own model, and done it bigger, better, and more consistently, backed by the world’s largest pool of cheap labour without those troublesome labour laws that had been on the rise in ASEAN. The inevitable shift of attention and investment to China exacerbated the post crisis decline. Sleeping beauty had awoken, hair black as stone, lips red as cherries, kissed by the prince of global capitalism. As recently as early this year respected Morgan Stanley economist Andy Xie was dismissing ASEAN as ‘a failure’, reflecting a commonly held view that its growth rates and attractiveness for investment fall below the radar screen compared to China. The Cinderella that is ASEAN remains hidden in the kitchen. Economic Outlook Q2, 2008 Page 2
  3. 3. 15 July 2007 The only problem is that this is simply not true, and has not been so for a while. ASEAN remains underbought, and China oversold. Just as the irrational exuberance of the ‘tiger years’ was founded on a much weaker base than widely recognized at the time (crony capitalism, poor credit extension, massive currency exposure etc.); the irrational pessimism that has persisted since simply does not measure up to the economic data. Even as a perpetual bull on the region, I continue to find that data has always surprised to the upside in most of the ASEAN economies, and has done so consistently for over three years. As far back as 2002 the region had finally recovered back to 4% in output growth (below which a developing nation’s economy, although growing, is not moving fast enough to enable confidence to recover), and cleared 5% by 2003. By Q2 2004, the core measures of economic health we look at were remarkably robust; given the crisis recovery process had been interrupted by the SARS shock in 2003 and the oil price shock shortly after. Restructuring of the banking systems was largely complete and credit extension was growing again, Indonesia had settled, inflation was under control. Three of the core nations had undergone a major change in political leadership without blinking, but the world appeared not to notice. In Indonesia, whose health determines the regions’, Yudhoyono had replaced Megawati with a popular mandate despite his lack of a major supporting party. Badawi replaced Mahathir in Malaysia and growth had returned, and Singapore was back on full growth after being hard hit by SARS and a changing of the guard from Goh to Lee. The result was uniformly positive. Within a year the data, in our view, signaled a strong case for reinvestment into the region. Our ‘ASEAN as Cinderella’ summary at the time, presented at a BCOC economic briefing in November 2005 (see picture one), indicated improved base performance on key indicators of output growth (GDP), cost of money (benchmark interest rates), and reserve strength. The three ‘under new management’ nations were posting growth rates in excess of 5% whilst, in Singapore and Malaysia, maintaining easy money. Indonesia’s 10.78% rate appeared to be a temporary oil price inflationary spike following the removal of energy subsidies. Both Vietnam and the Philippines, without any changes in leadership, were topping their normal growth rates whilst maintaining relatively easy money. Only Thailand, with 3.3% output growth and 3.5% money, was underperforming. Foreign exchange reserves in all nations were adequate to cover short term debts and liquidity needs. To be sure this was not China’s overheated and politically maintained 10% plus growth, but here was a $700 billion dollar regional economy with 500 million people that came at a deep price discount. At the time, according to one data source, the market capitalization of the whole of the Indonesian stock market cost less than Google, Inc. And competition for assets and deals was a fraction of that in China. A tour of major private equity firms who had set up in Asia at the time said it all – every office turned out to be in Hong Kong, and all the deals being sourced were in China. A comparative risk investment for ourselves-a mid size bank requiring some heavyweight restructuring- cost nearly four times book value in China versus one and a half in Malaysia. ASEAN was cheap. Economic Outlook Q2, 2008 Page 3
  4. 4. 15 July 2007 True, for the ASEAN naysayers, all the well known risks did remain on the table. It was fair to worry that the regions GDP growth had been export driven, mainly to the US, and domestic consumption remained weak. Credit recovery in Asean banking systems, though better, remained on the slow lane. Domestic property markets remained in the doldrums, including Singapore, although the first signs of recovery were budding. Currencies were managed in relatively free regimes compared to 1997, but still ‘managed’, or in Malaysia’s case controlled. The era of global ultra low interest rates appeared to be over as Fed policymakers shifted to tightening. Inflationary signs had appeared worldwide, amplified by oil prices, with the risk that a significant slowdown in US output would hurt ASEAN’s export dependent economies. The worries proved either unfounded, or remain on the table today, whilst ASEAN’s growth has continued unimpeded. Nearly two years on, we revisited the ‘Cinderella’ data summary in June this year for the tenth anniversary of the crisis, again for a BCOC event (picture two). Again, the numbers speak for themselves. Indonesia has surprised to the upside, back above 6% growth, inflation on the decline and money approaching 9%. Vietnam, the ASEAN star, is now one of the fastest growing economies in the world (8.2 percent) with a new leader, PM Hung, in power. Malaysia has maintained growth whilst keeping money easy. Singapore is on a roll as its planned economic revitalization takes hold, with the latest Q2 growth exceeding 8% -the fastest growth of all developed economies in the world –and its property sector enters a new, multi year growth cycle. Thailand again has provided the only concern and investment risk since 2005, with Thaksin replaced by a military caretaker government and growth still below par. But signs are strong that the economy would move fast when political normalcy returns, and Thailand could be the best performer in the medium term. The Philippines, never our favourite Asean economy structurally, Economic Outlook Q2, 2008 Page 4
  5. 5. 15 July 2007 has provided the biggest surprise to the upside in our view, posting 6.9% in the latest quarter and strong reserves growth. What happened? ASEAN, and indeed the global economy, has proven considerably more resilient than the doubters thought. The end of over easy money still leaves rates in most systems considerably lower in real terms than those businessmen had to live with ten to fifteen years ago. China and Japan continue with very easy money policies. The $13 trillion US economy has withstood an energy driven inflation shock because consumer incomes have risen much faster than energy prices in last 30 years, and energy itself has fallen in its contribution to total output as the economy has shifted to services and technology. US consumer spending, and thus Asian exports, have held up, and will continue to do so. The ASEAN consumer economy has finally started to contribute to domestic growth, and the pace of loan growth has improved. Mr. Xie could argue that growth remains nowhere near ‘potential’ relative to China or even rising India, but ASEAN’s Cinderella status with global investors has meant that the FDI that the region once enjoyed has never recovered and now goes to China, to the tune of $50 billion a year. This supports China’s 10% plus growth rates, but slows down ASEAN’s maximum potential by two percentage points or more. Given the low level of investment support, the performance of the region has been very decent. Those who believed in the region back in 2004/5 and invested in ASEAN have done very well. Of course, despite our long founded bullishness on ASEAN, we accept that risks remain and that much of the reform agenda remains incomplete. But another ‘crisis’ similar to 1997- a currency and banking system collapse- is we believe highly improbable. Most of the economic risks to ASEAN, including the inflationary signals, appear manageable. US debt loads remain one of our biggest concerns, but the economic clearing mechanism would likely be the devaluation of the US dollar. A Economic Outlook Q2, 2008 Page 5
  6. 6. 15 July 2007 sudden loss of confidence in the dollar would indeed be a crisis given the extent of ASEAN holdings of dollars. But if engineered on a ‘managed decline’ as seems to be happening, this will play out in the relative strengthening of ASEAN currencies and perhaps some loss of export competitiveness, not too bad an outcome. The risks that remain the least manageable, and have the most potential to return ASEAN to a genuine crisis, are geopolitical and biological, not economic. The risk of a major pandemic from bird flu or another Asian-centered virus remains real. A major terrorist strike in one of the major ASEAN city centers, or problems in the Taiwan straits, hopefully remain in the realms of worst case scenario planning models, but ones with nasty outcomes. So we continue to believe that businessmen and investors should stay the course with the ASEAN economies and continue to invest, as we do. Cinderella remains better value than Sleeping (but awoken) Beauty. Global Disclaimer This research note and/or opinion paper, article, or analysis has been released by Calamander Capital (Singapore) Pte Ltd., or its parent company or affiliates, to professional investors, clients, and business members of the British Chamber of Commerce for information only, and its accuracy/completeness is not guaranteed. All opinions may change without notice. The opinions expressed, unless stated otherwise, are not investment recommendations, or an offer or solicitation to buy/sell any funds, investments or other services of the Calamander Group, Calamander Capital, or its affiliates. Calamander Capital does not accept any liability arising from the use of this communication. Copyright © 2008 Calamander Capital. All rights reserved. Intended for recipient only and not for further distribution without the consent of Calamander Capital Pte Ltd For further details, please contact calamander capital (singapore) pte ltd (co. reg. no. 200723396M) MAS exempted fund manager 85 a/b circular road, singapore 049437 tel. +65 6723 8129 fax. +65 6491 1227 Economic Outlook Q2, 2008 Page 6
  7. 7. 15 July 2007 alternative investments in the world’s fastest growing markets singapore property fund II sri lanka private equity fund meridian emerging market art fund the wine growth fund asia emerging banking fund calamander capital (singapore) private limited 85 a/b circular road calamander capital management limited (cayman) singapore 049347 calamander group (singapore) private limited tel. +65 6723 8129 meridian art partners, llc fax. +65 6491 1227 Economic Outlook Q2, 2008 Page 7