Emerging markets solid: investment guru

What is your investment strategy during |a period of low growth in the global |economy?
It depends where you are. If you look at growth, there is high growth now in emerging markets. Emerging markets are growing four times faster than developed countries. We talk about an average of 4-per-cent growth in emerging markets versus less than 1 per cent in developed countries. So the strategy is to stay |in emerging markets, where the growth is.
 
Is Asia going to experience a financial crisis in the near future?
No. The reasons are, first, the debt-to-GDP [gross domestic product] ratio is very low in Asia, and in other emerging markets as well. Secondly, foreign-exchange reserves are very high, and thirdly, interest rates are relatively low. So those three factors mean it will be very difficult for these countries to have a financial crisis.

Are shares in emerging markets relatively expensive?
No. Right now if you put money, US dollars, in the banks you get less than 1 per cent. The dividend yield for stocks is more than double that amount, at 2 or 3 per cent, and some stocks can get you a yield of 5 or 6 per cent. So stocks are not expensive and we find a lot of opportunities in the equity markets.
 
Some say the SET Index at about 1,000 points fully reflects the fundamentals of listed firms. What is your opinion?
This is not really true. If you look at P/E [price-to-earning] levels, they are not excessive for Thailand. Now look at the price-to-book value for Thailand and the MSCI in general; we’re lower than we were in 2007, and in 2003 or 2004. And another interesting thing about Thailand is that the return on equity is high.
 
Will last year’s severe flooding have an impact on corporate earnings this year?
In a positive way, because with the reconstruction work, there will be more spending, and the government is doing a lot of spending. The minimum wage is also being increased. All these factors will have a positive effect. Of course, it depends on the company, but generally speaking, it will be positive.
 
Indonesia is emerging – is its stock |market more interesting than the Thai market?
No, because the number of stocks we can buy in Indonesia that meet our criteria is less than the number in Thailand. Our weighting in Thailand is much higher than in Indonesia. We weight Thailand higher in our Templeton Asian Growth Fund.

How much potential is there in Burma for attracting foreign investment?
There is incredible potential. The question is when the potential will be realised. If you look at almost any measure in terms of consumption of any product, it is far behind Thailand, but they are a bigger |country.
The first order of business, the first thing that has to be done, of course, is that the currency has to be stabilised, as currently there are too many exchange rates. The official exchange rate is very different from the actual exchange rate. And the actual exchange rate varies all over the place.
Then they have to get the banking system in order. This will take time, as the first investment will be foreign direct investment. There might be some Burmese companies listing outside the country, in Singapore or Thailand. You will probably see that. Or there may be companies such as Siam Cement building new plants there, offering opportunities for us to get exposure that way.

How long can China maintain its impressive growth?
China will continue to experience a growth rate of 7 to 8 per cent. For this year and next, they can have pretty high growth, but you cannot expect high growth forever because as the base becomes bigger and bigger, so the percentage change also becomes more and more difficult.

What about possible Chinese banking |trouble deriving from bad loans?
They are very well capitalised. After lending increasing tremendously in 2009, they realised non-performing loans could rise; therefore, they increased the capital of banks dramatically in 2010.

Is the Chinese housing market in a bubble right now?
There are a lot of empty houses and other buildings, but it is very different from what happened in the United States, as the leveraging was not as high as in the US. They don’t have credit-default swaps and there are no derivatives on housing.
Moreover, there is still big demand for housing, and it is a matter of price. So I expect prices to come down and more and more housing to become affordable.
 
Will China remain a major export market for Thailand and other Asean countries?
Definitely, China will remain a major trading partner for Thailand and other countries, as commerce has increased significantly.

Can Thai or Asean companies compete with giant Chinese firms?
Yes, it already happens. There are lot of manufacturing sectors here competing directly with Chinese manufacturing. As Asean becomes more free-trade-oriented, then they [regional businesses] will become much more competitive.
 
Will China be negatively affected by the sovereign-debt crisis in the euro zone?
I don’t think So because the percentage of exports going to Europe has been declining, so they do not depend [heavily] on exports to Europe.
 Besides, the European debt crisis is overstated; it is not as bad as people think. Japan and the US also have high debts. It depends on people’s perceptions. And the Europeans will come to some agreement, I believe – an agreement on how to solve the problem. They will probably reach an agreement on fiscal reform and restructuring of the debts.

Do you expect some countries will be forced to drop the euro?
People are mistaken about the connection between currency and debt; there is no connection between the two. If a country moves to another currency, it will still have debts. It is not a solution. And switching to other currencies would weaken them even more.

Some economists say countries like Greece need a weaker currency instead of a strong euro in order to export more. What is your view?
It is very simple – what you have to do is lower prices. It is not a matter of currency, but of prices. So what they need to do is to reform so that prices come down. Then they can export.
 Thailand actually went through strict reform [after the 1997 financial crisis], but the US and Europe refuse to do so now. Thailand took its medicine and the economy recovered within two and a half years. In the short term it is very painful, but in the longer term it works.

Are you confident about the Thai government’s flood-disaster prevention plans?
Yes, the government has learned a lot from what happened. I think the authorities will do a better job next time.

Will climate change threaten your |investment?
No, I don’t see an impact, not in the short term. Generally speaking, Southeast Asia is rich in agriculture and has a lot of water, which is very important.
Many countries around the world would love to have flooding [to facilitate irrigation].
Thailand is blessed in having a lot of water.