by Elliott R. Morss, with the assistance of Renzie Doem Agutaya

Introduction 

In late February, I was contacted by Mr. Agutaya, a Philippine Certified Public Accountant. He asked via e-mail what I thought of investing in The Philippines. It reminded me that in Asia, most Western attention has focused on China, Hong Kong, India, and Singapore. So I suggested a two-part series. In the first, we look investment prospects in a number of Asian countries. In the second, we look more closely at specific Philippine investment opportunities.

Background 

Geographic and other “size” data on Asia countries are presented in Table 1. It is not surprising to find that China and India are the largest, with the Philippines ranking fifth, just below Indonesia. The population density figures for China and India are somewhat misleading: even though raw data show India as almost three times as densely populated as China, the arable land of India (1.5 million sq. km.) is actually greater than that of China (1.2 million sq. km.).

 

Table 1. – Asian Countries: Population, Size, GDP

Source: World Bank

 

China’s GDP is four times as large as India’s, even though their populations are about the same. Per capita incomes of South Korea and Taiwan are much greater than other Asian powers, with Malaysia a distant third.

 

Over the last two decades, most Asian countries have grown rapidly. Table 2 provides the annual average growth rates for both GDP and by sector for Asian countries. Growth was interrupted in 1997 by the Asian financial collapse, but great gains have been made since then.

 

Table 2. – Average Annual Growth Rate, 1990 – 2009

Source: Asian Development Bank

 

In most developing countries, the industry and service sectors grow more rapidly than agriculture. The final column in Table 2 gives the ratio of the average growth rate in the industry and service sectors relative to agriculture. For most countries, the industry and service sectors grew by more than twice as fast as agriculture.

 

In the sixties, the Philippines was second only to Japan as the richest nation in Asia. However, the Marcos reign (1965-1986) brought in corruption and slower growth. In February 1986, the “bloodless revolution” (People Power Revolution) removed Marcos from power.

Recession Effects 

The Western banking collapse caused a global panic and launched the global recession. In most Asian countries, the initial impact was seen in falling exports and stock market collapses. These, in turn, led to further domestic reductions in aggregate demand.

 

Table 3 shows how exports of Asian nations fell off in 2009. Inasmuch as exports had been the primary “engine of growth” for most of these countries over the last two decades, the collapse in global demand hit them hard.

 

Table 3 – Percent Fall in Exports,

Asian Nations, 2009

Source: IMF Balance of Payments Database

 

Table 4 provides data on global stock market losses following the Western bank collapse. In the ensuing panic, virtually all markets lost 50% or more. The losses are calculated from stock market highs (usually some point in late 2007 or early 2008 to the bottom during the recession).

 

Table 4. – Global Recession Stock Market Performance

Source: Bloomberg

 

As I pointed out in an earlier article, global stock market losses totaled $36 trillion, and the resulting “wealth effect” cause a further reduction in aggregate demand.

Recovery 

It is remarkable how rapidly Asian countries have recovered from the global recession. Table 5 provides this information, along with data for Europe, Japan and the United States. While Western nations continue to struggle with unemployment and debt, Asia is growing rapidly again.

 

Table 5. - GDP Growth Projections

Source: International Monetary Fund, World Economic Outlook Database, April 2010

 

In the past, Asian countries depended on exports for growth. But now, growing middle classes are the primary engine for growth. In the Philippines, consumption is fueled by high level of remittances. These remittances account for about 5% of GDP.

Investing in Asia 

For foreign investors, there are two key questions to be addressed before getting to specific investment choices:

• How is the stock market likely to perform, and
• Whatwill happen to the currency?  

Looking Forward: How Are Stock Markets Likely to Perform?

Table 6 shows how much stock markets have recovered from their pre-recession highs. The European, American, Japanese, and even Brazilian markets still have a way to go.

 

Table 6. - Stock Market Recoveries

Source: Yahoo Finance

 

In Asia, Indonesia and Thailand are way ahead of their pre-recession highs. The markets of The Philippines, South Korea, and Malaysia have fully recovered, while China and Vietnam are still way off their earlier highs.

 

One measure of whether a market is over-bought is its price to earnings ratio (P/E). To get an approximation of these, I have taken the P/Es of Exchange Traded Funds (ETFs) that broadly reflect each country’s stock market. The results are presented in Table 7.

 

Table 7. – Price Earnings Approximations

Source: Yahoo Finance

 

The P/Es for India, Indonesia, and Malaysia suggest proceeding with caution, while the P/Es of South Korea, The Philippines, and China appear quite reasonable. 

 Looking Forward: What Will Happen to Currency Values? 

What happens to currency values is important because for overseas investors, capital gains or losses will be made on currency valuation changes. Consider the following concrete example. Suppose you invested $100 in Nikkei 225 on February 1, 2007 and liquidated it on February 1, 2011. As Table 8 illustrates, you would have lost 41% on the Nikkei 225. But because the Yen appreciated 46% against the US$, your net loss would only have been 14%. In short, when investing overseas, you can earn capital gains or losses on currency value changes as well as on stock market movements.

 

Table 8. – Capital Gains for Foreign Investor

Source: Yahoo Finance, Oanda

 

Consider first what has been happening to exchange rates.  In the global panic resulting from the Western banking collapse, the dollar gained value as a “safe haven”. But as Table 9 shows, all Asian currencies gained value relative to the US$ since 2009. This is causing concern in most Asian countries inasmuch as the appreciation of their currencies makes their exports less competitive in the US. Since 2009, both the Indonesian and Malaysian currencies appreciated 16% against the US$.

 

Table 9. - Currency Rates per US$

Source: Oanda

 

Will these currency appreciations continue, or will these currencies lose value moving forward? What causes currencies to lose value? The biggest danger is that economies will overheat, driving up domestic prices and increasing imports with a consequent drop in the local currency value. For these concerns, there are several key indicators worth examining:  

• GDP growth rates;
• Government balances;
• Government debt;
• Current account balances, and
• Inflation.

 GDP Growth Rates - The projected GDP growth rates reported in Table 5 for Asian countries are impressively high. But they are not out of line with past performance. No concern here.

Government Balances - Data on projected government deficits are presented in Table 10. With the exception of India, it appears that all governments are moving from stimulus to a more neutral policy. The projected deficits of Malaysia, Vietnam, and India are troubling.

 

Table 10. – Government Deficits

Source: IMF, “Fiscal Monitor” and World Economic Outlook Database

 

Government Debt - Problems in the Euro area are indicative of what can happen when government debt is excessive. Table 11 provides data on the debt of Asian governments. Government debts lower than 50% of GDP are quite manageable, particularly if the government is not running large surpluses. The debt coupled with the deficits of India and Vietnam are a cause for concern.

 

Table 11. – Gross Government Debt, 2010

Source: IMF, International Financial Statistics

 

Current Account Balance - There is also the question of whether the countries’ current account balances are manageable. Large current account deficits are precursors of weaker currencies. Projections of the current accounts are presented in Table 12. The current account deficits of both India and Vietnam are notable.

 

Table 12. - Current Account Projections

Source: IMF, “Fiscal Monitor” and World Economic Outlook Database

 

The Philippines is projected to run a trade deficit of 10.2% of GDP in 2010. However, its unusually high income remittances from workers abroad (4.8% of GDP) contributes significantly to its positive current account balance.

Inflation - Domestic inflation can also be a leading indicator of weaker currencies in the future. Table 13 provides historic and projected data on consumer prices. Once again, Vietnam and India are the most worrisome.

 

Table 13. – Consumer Price Increases, Asian Countries

Source: IMF: WEO Database

 

A View from the Private Sector

One indication of how Asian countries are viewed by foreign investors are sovereign bond spreads: how much more these countries have to pay for loans than the US. This information is presented in Table 14.

 

Table 14. – Sovereign Bond Interest Rate Spreads, March 2011

(basis points over US Treasuries)

Source: World Bank GEM Data

 

Conclusions 

This review of Asian nations suggests that investments in China, The Philippines, and South Korea should do well in the next few years. These countries are projected to grow at acceptable rates in the next few years with little chance of currency losses. At the other extreme, India and Vietnam appear risky. Both countries are projected to run large government and current account deficits and already have large government liabilities. The stock market runups in both Indonesia and Thailand makes one wonder how much further they will go. The estimated P/Es of India, Indonesia, Malaysia and Taiwan are very high.   

In the second part of this two part series, attention will be given to specific investment opportunities in The Philippines.