Look East


Some investors may be hoping that the recent sell-off by foreign investors on the Stock Exchange of Thailand – which was mainly driven by reactions to China’s economic policy decisions, profit taking, the border dispute with Cambodia and rising fears that political tensions in Thailand could overspill into street violence again – may cause a sustained depreciation of the baht.

Since the start of December we have warned of fluctuations in the exchange rate between the baht and the greenback, due to foreign fund flows in and out of the Kingdom. We also emphasised that the recent strengthening of Thailand’s currency was no mere blip, instead marking a fundamental shift in the global economic balance of power that was most clearly demonstrated by the role Asia played in leading the recovery from the global financial crisis, but which dates back to Asia’s emergence from the problems that led to the crisis of 1997, whereas the Western world is still dealing with its own excessive indebtedness.

So anyone hoping that any such fluctuations will rapidly mark a sustained return to the good old days after the 1997 Asian Financial Crisis, when Western currencies enjoyed massive spending power in Thailand, needs to take a second look.

In 1997, Thailand had an overheating economy which was fuelled by hot money, and a bloated financial sector underpinned by a speculation-fuelled property market. The house of cards collapsed rapidly and with massive effect, sending shock waves throughout the region and beyond.

The key point is that the 1997 crash was the result of fundamental weaknesses in Thailand and Southeast Asia’s financial markets, which were dramatically exposed once the rampant growth that defined the Tiger economies had become unsustainable. This very much ties in with our belief in long term business cycles which fall into four distinct parts, each typically lasting 15-20 years and which, for Western readers, we tend to describe as spring, summer, autumn and winter. Spring is when new businesses are set up, jobs created and trade steadily starts to grow. Summer sees things blossom. The rate of growth is increased by the use of leverage and this leads to inflation running away. Higher interest rates to control inflation ultimately lead to winter when slower rates of growth are no longer able to support the higher interest rates and recession appears. The boom cycle has always ended in bust to puncture the debt bubble. This was the case for Asia in the mid to late ’90s and for many other emerging economies, such as Latin America, where the peso crisis preceded Asia’s sequel.

Heavily dependent on IMF funding, Asia had to follow the bankers’ textbook for dealing with the bust part of the cycle.

The upside of the 1997 bitter pill was the implementation of better regulations and practices which strengthened financial systems and reduced government debt throughout the region. Exports then boomed due to the increased strength of buyer currencies in the northern hemisphere, giving birth to a host of new industries which in turn drove local development and increased consumer spending power. In short, Asia cleaned its house and was able to fast-track its recovery on the back of spending by Western consumers, business and governments.

But the excessive largesse and greed that denoted the so-called Casino Capitalism of the USA and Europe resulted in the 2008 global financial crisis. We have seen the onset of economic adjustment in the traditional economic powerhouses of the world beleaguered by weak production, high unemployment, an ageing population and massive national debt.

However, the Western economies have eschewed the traditional remedies that were prescribed in Asia in favour of “experimental economics”, a set of solutions that have been tried in the past and have never worked but are now being implemented in a much more extreme format, in case the reason for their failure was that they were not done sufficiently vigorously in previous attempts.

Is it possible to know whether this time will be different? Clearly, judging by the undecided economic debate among experts, the ordinary investor or baht user will struggle to forecast the outcome.

People based in Thailand and remunerated in baht should focus on the local currency for the long term. For residents, that means buying baht at the best price. The baht should be expected to continue to strengthen over the long term but there is a significant risk that we’ll see a flight to the greenback at some point in the near future thus presenting a better opportunity to sell dollars or to buy baht at something like a 20 percent lower rate versus the dollar than today. However, this is far from being a certainty.

As always, there is risk. But if you’re looking to hold on to your baht for the medium to long term trend to provide solid baht appreciation over the next decade or so, the safer call may be to simply go with the expected long term.

Hedging against a baht correction is another option, but this requires expertise in both timing and selecting the correct hedge. There are a number of products in the market, such as Global Diversified Investment portfolios – we promote Miton Optimal’s Rhodium – which hedge in baht as well as most of the major currencies and the Singapore dollar and are able to deliver global asset performance with the ability to access offshore assets in baht. Also, there are covered bond funds which currently yield about 7 percent a year in baht.

By taking exposure to globally diversified portfolios in this way baht investors are able to diversify risk across global assets without taking currency risk.

Perhaps the investors facing the toughest decision now are those who live and work locally but have their salaries, savings and investments in their national currencies – eg, dollars or euros. For example, in the past four years the spending power of British expats based in Thailand who are remunerated in Sterling has declined by about 40 percent. Those earning in US dollars have seen a decline of about one-third in the same period.

If you’re in this boat and planning to stay in Thailand or the region for the foreseeable future, then you need to take a position which gives you the most bang for your baht. Holding on to Western currencies indefinitely is increasingly unlikely to deliver this.

The golden rule is that your income-producing assets should be held in or hedged to your currencies of expenditures.

Expats planning to return to their home countries could benefit from investing in emerging market currencies now, assuming these will continue to appreciate at a faster rate than dollars and euros.

As was recently pointed out in MBMG’s 2011 outlook, “Gorillas in the Mist”, the currency wars of the last few years have increased volatility in the currency markets but savvy investors should look to protect themselves against the risks that this creates and to exploit the opportunities.

A survey by Lloyds-TSB International last year found that over 80 percent of UK expats still hold their savings in Sterling. This seems to be out of habit rather than any conscious decision. Unless they definitely plan to return to the UK the consequences of this bad habit could prove to be very expensive. For expatriates in Asia who can witness the rebalancing of global economic power first hand, this is an issue about which they should be much more aware.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]