Governments Fostering Markets’ Growth

The South Asian markets are presenting a favourable investment opportunity. With the respective governments creating enabling conditions for the markets’ growth, those considering making investments in emerging markets can consider this option, says Vikas Gattani, CEO, Progress Capital.

In Singapore, the opposition Workers’ Party’s candidate won 54.5 per cent of votes for the Punggol East seat, beating the incumbent government People’s Action Party’s (PAP) candidate in a bye-election that was held recently. This development is important because it suggests a shift in voting pattern in the city state. The PAP government has been in power since independence in 1965 and accounts for Singapore’s stability and development into a first-world city state. Part of the discontent against PAP stems from rising property prices, immigration-friendly policies resulting in the supply of foreign labour etc. However, in recent months, the government has taken steps to address this discontent but the effects are yet to sink in.

South Korea’s GDP grew at 0.4 per cent QoQ against an expected 0.5 per cent. This is slightly higher than that in the prior quarter, wherein it had expanded by 0.1 per cent. Export growth here could face some headwinds going forward, given the tough competition from Japanese exporters in everything ranging from cars to electronics. Following this, the Finance Minister Bahk Jae Wan has signalled that there may be more easing on its currency to aid local exporters, such as Samsung Electronics, which account for almost half of its GDP. The industrial production for December 2012 grew by 0.8 per cent on a YoY basis (against an estimated growth of 1.2 per cent) as domestic demand strengthened and offset weakness in exports.

Real GDP growth in the Philippines has beat expectations again, coming in at 1.5 per cent for Q42012 and 6.8 per cent for 2012 as a whole. In Q3, the GDP growth was revised upwards from 1.3 per cent to 1.7 per cent. Domestic spending in that country has boomed on account of easy liquidity, election spending and strong remittances. Philippines held its overnight borrowing rate at 3.5 per cent, opting instead to reduce the rates on special deposit accounts to curb capital inflows.

Investors seeking higher returns in emerging markets have driven large inflows into them, and this sets in the threat of asset price bubbles being created. The Bangkok Central Bank Governor has said it will impose limits on currency forward positions at banks at 20 per cent of capital for local lenders and 100 per cent for foreign entities. Thailand’s Q4 GDP rose by 6.8 per cent on a YoY basis, higher than the 6.3 per cent that was expected (this too was against the earlier estimate of 7.1 per cent). The central bank refrained from cutting its benchmark rate to boost capital inflow, as private investment has started yielding growth.

At 52.3, China’s HSBC PMI for Jan 2013 was higher than the expected figure of 51.7 in January 2012. It was also better than the reading of 51.5 in December 2012, suggesting that economic growth will accelerate for a second straight quarter.

Vietnam recorded a trade surplus for January 2012 as the demand for exports mildly overtook imports. Exports from the country recorded a YTD growth of 43.2 per cent (against a prior 7.1 per cent) for the month, while imports grew 42.3 per cent (against a prior estimate of 18.3 per cent). Global recovery is pushing the demand for the nation’s goods, as shipments are mainly driven by foreign companies. The appreciation of the Viet Dong enabled the State Bank of Vietnam to rebuild its foreign exchange reserves.

I would like to discuss Vietnam market in particular in some more detail. While it is one of the frontier markets and not the main market for any global institutional investor, there are always opportunities when a frontier economy looks poised to take off as it can lead to multifold returns.

The Vietnamese market has been a laggard for over four years now. The index had declined by about 60 per cent from its peak in October 2007, while some of the other ASEAN markets like Philippines, Thailand and Indonesia have risen three-fold since then. The Viet Dong depreciated by some 30 per cent since 2007 and finally stabilised in 2012. However, the country’s macro fundamentals have now improved. The GDP growth touched a low of four per cent in Q12012 and has improved to five per cent in Q42012. Inflation has fallen to 6.8 per cent in end-2012 from over 20 per cent in mid-2011. Its central bank has started to ease policy rates from the peak of 15 per cent in Feb 2012 to nine per cent now. The government has introduced a variety of measures including tax breaks to attract investment and induce growth. Vietnam, a country of 90 million people with 87 per cent of its population below 55 years, is poised to grow at six per cent plus in 2013 and further. It is attracting a lot of attention from growth seeking investors. The market is already up 18 per cent this year (remember the Nifty in 2003?) This market can provide multi-fold returns over the next few years. One can invest in this market by buying USD-listed ETF VNM US and holding it with a long-term perspective in mind.

(As told to Dalal Street Investment Journal. The magazine may or may not subscribe to the views expressed in the article. You may send your feedback to comment@dsij.in)