Let’s talk politics. Last week, a fresh-faced, largely untested politician won a hard-fought race to run a country struggling with some pressing structural problems.
I’m not talking about Britain’s general election. I’m talking about the battle to be the next president of the Philippines.
Here I’ll take a look at what’s been going on in one of Asia’s most disappointing economies. Then we’ll delve into a scandal in Indonesia, and catch up on the latest from Thailand…
Asia’s leading laggard
• Should you invest in the Philippines?
• Thailand’s woes aren’t over
• MoneyWeek Asia archive
The result of the Philippines 2010 presidential election isn’t yet official. But there’s little doubt that Beningo “Noynoy” Aquino has convincingly topped the polls (see chart below). All but one of his rivals has now conceded defeat.
But winning the vote will be the least of the challenges ahead for Aquino.
The Philippines’ problems can be summed up in two charts. One is the country’s high level of corruption. It’s among the worst in Asia, as you can see below.
The other is the low level of investment. At under 15% of GDP, this is way below most of its regional peers and has been falling steadily for years (see below).
As I discussed in more detail here: Should you invest in the Philippines?, these factors explain why the country lags most of the rest of the region.
It’s not down to a lack of resources. Huge reserves of minerals remain underexploited due to unhelpful laws, a lack of infrastructure and other factors that put off international mining investment. And there’s no shortage of other selling points. For example, the English-speaking population has helped the outsourcing industry grow strongly in recent years.
The Philippines’ woes are down to government incompetence; crony capitalism that only enriches a few powerful families; and high levels of political violence. These have left it as Asia’s worst laggard.
So it’s no wonder that investors have largely ignored the country. Stock market liquidity is low in all but a few major stocks. And it remains the only major Asian country that has no exchange-traded fund (ETF) to provide a cheap way into the market.
Progress will be slow at best
Can the new president turn things around? It’s hard to say. Aquino doesn’t have much of a record. He was propelled to the presidency largely by virtue of his family background. He is the son of Corazon Aquino (the first democratically elected president after dictator Ferdinand Marcos was toppled in 1986), and Benigno Aquino, another assassinated opponent of Marcos. After many low-key years in the legislature, Aquino’s mother’s death last year created a clamour for him to run for the top job, in the hope that he would come up to the same standard.
Aquino has pledged to do exactly what the country needs. That is, to clean up politics and improve investment. No-one seems to doubt his sincerity or personal honesty, sadly a rare thing in Philippines politics.
But it will still be a very tough job, particularly as his service to date shows little major success in these kinds of battles. Political and financial power remains entrenched in a few key families. For example, outgoing president Gloria Macapagal Arroyo made an immediate return to government as a senator, along with the former dictator Marcos’s infamous widow Imelda. Party loyalties and civic duties are mostly meaningless. Most politicians align themselves at each election to secure the most patronage.
Still, even if a major step forward is a lot to ask, incremental progress might be possible. Arroyo’s term, while surrounded by allegations of corruption, at least saw the public finances improve.
And in the long run, more help could come from an unlikely source. China, with its huge need for raw materials, is an obvious partner for such a resource-rich country, and a growing source of inbound investment.
The Philippines is by no means a core Asian investment. But if it makes progress, it could become interesting. Such a small and illiquid market is highly likely to develop into a bubble if foreign money begins to flow in.
Still, there’s no hurry, which is lucky given the lack of investment options. I’m only aware of two dedicated funds (details are below). But even if you are interested in this potential turnaround story, I’d suggest waiting to see if a low-cost, easy-access ETF arrives in the next few months. Global X Management has registered one in the US, although this doesn’t mean it will necessarily be launched.
| Fund | Total expense ratio | Minimum |
|---|---|---|
| Open-end funds | ||
| Allianz RCM Philippines | 2.14% | $5,000 |
| Lion Global Philippines | 2.04% | S$5,000 |
Political point-scoring in Indonesia
It’s optimistic to expect Aquino to turn the Philippines around. But the right politician can certainly have a big impact. Take Indonesia. It has many of the same problems, but is clearly going in the right direction since the election of Susilo Bambang Yudhoyono as president in 2004.
Reforms have been slower than many would have liked. Yet the country has made enormous progress after emerging from the deep recession that followed the Asian crisis. GDP fell by over 13% in real terms in 1998, amid hyperinflation and a collapse in the value of the rupiah.
Now the financial system has been cleaned up to the point where Indonesian banks are a credible investment. The power of the established business families, while still strong, was weakened more than in any other post-crisis Southeast Asian country. And the political system – a dictatorship until 1998 – now seems to be a strong and improving democracy.
But it’s never entirely smooth going in emerging markets, as a recent political storm shows. At the peak of the financial crisis in October 2008, the government decided to bail out the failing Bank Century at a cost of 6.7trn rupiah ($735m), warning that its collapse could create a run on the Indonesian banking system.
Opposition politicians have since claimed that the bail-out was illegal. Some have further alleged that some of the money made its way to Yudhoyono’s re-election campaign or his allies. They demanded the resignation of Boediono, Yudhoyono’s vice president, and Sri Mulyani Indrawati, the finance minister, who were involved in the bail-out decision.
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There’s no evidence so far to support these claims. The affair looks like political grandstanding. For some of those involved in supporting the charges, the goal is more about forestalling investigations into their own dodgy dealings or settling personal grudges, than cleaning Indonesian politics up. Both the ministers they have accused are highly regarded reformists. If the opposition succeeded in disgracing them, it would be a big victory for anti-reform figures and a huge blow to Yudhoyono’s agenda.
Fortunately, that’s unlikely. There will be a formal investigation, but the legislature was unable to pass specific charges against Boediono and Sri Mulyani. And the investigation will be carried out by the mostly independent and honest Corruption Eradication Commission (KPK).
However, it has already created problems. Sri Mulyani is leaving the cabinet to become a managing director at the World Bank. Her departure is a loss to Yudhoyono’s reform programme, although the main candidates to replace her look sound.
Indonesia’s economy is doing well – and so is the market
So a political relapse is now the main threat to an economy that is otherwise doing very well. GDP growth held up well during the crisis, with growth hitting 5.7% year-on-year in the first quarter. Investment is rising, consumer confidence is strong and bank lending is on the up (see chart below).
Politics could potentially undermine this. But it seems unlikely. Yudhoyono’s approval ratings remain very high. The public largely agrees with moves to reform the system. There were widespread protests when corrupt officials tried to frame members of the KPK at the end of last year.
More recently, the attacks on his allies have encouraged the normally conciliatory, low-key president to take on his opponents more openly. That’s encouraging. It could help force through further reforms. The resistance of the Indonesian old guard to his changes is more plainly self-serving than ever.
So far, investors remain mostly unconcerned. The Jakarta Composite is just 4% off its recent highs, in line with global reaction to the eurozone jitters. However, a major pull-back in the Indonesian market at some point seems likely. Stocks have come back very strongly over the last year. Indonesia is among the very few markets to top its pre-crisis levels.
The price/earnings ratio of 19 is not yet too stretched given the country’s potential. But it’s certainly not cheap anymore. However, it remains a sound long-term prospect. And it certainly hasn’t fully entered the investment mainstream, which means we can expect more investors to move in.
The table below lists all the Indonesian funds that I’m aware of. A newly-launched Singapore-listed ETF from Deutsche Bank suggests interest is growing. The best ways to invest are either of the ETFs or the Aberdeen-managed closed-end Indonesia Fund, which is currently at a discount of 11% to net asset value.
| Fund | Total expense ratio | Listed |
|---|---|---|
| Exchange-traded funds | ||
| db x-trackers MSCI Indonesia | 0.65% | SG:XMIN |
| Van Exk Market Vectors Indonesia | 0.68% | US:IDX |
| Closed-end funds | ||
| Indonesia Fund | 1.62% | US:IF |
| Open-end funds | Minimum | |
| Allianz RCM Indonesia | 2.41% | $5,000 |
| Fidelity Funds Indonesia | 2.04% | $2,500 |
Thailand’s crisis takes a bloody turn for the worse
Finally this week, the political situation in Thailand remains bloody and intractable. At least 30 people are said to have been killed by the army in recent days as they try to force out the red shirt movement occupying central Bangkok. (See my recent piece Thailand’s woes aren’t over for more)
The government is now going all in on this clampdown. It may pay off. It may set a clear precedent on how far protests can go and still be tolerated, It might roll back the swing towards anarchy that has resulted from the red shirts’ blockade and the rival yellow shirts’ occupation of the airports in December 2008.
But it could equally go horrifically wrong. The country has a long history of the army bloodily putting down protests – most recently in 1992.
One worrying factor is that it’s become clearer in the last few weeks that there are multiple factions at work. Thaksin is being mentioned less frequently by the red shirts, indicating that other leaders have their own agendas.
Meanwhile, there are reports of feuds and struggles for influence between different army factions. A renegade general who supported the red shirts was killed. There are reports of army units firing on their peers. And then there’s the appearance of masked gunmen – almost certainly special forces – apparently targeting senior officers for assassination during the peak of the violence.
As I’ve said before, I can’t view a tragedy like this as an investment opportunity, especially as I have friends caught in the middle of it. Still, I wouldn’t be doing my job if I didn’t point out that as long the country doesn’t lurch into civil war, then the worse the situation gets, the more likely that rock bottom is close.
History suggests that investing at that time will be very profitable. Closed-end funds will almost certainly be the best option here. Low valuations in the market will be compounded by large discounts on the funds at the point of maximum fear.
A full list of funds of all types is below. My watchlist pick would be Aberdeen New Thai. It’s currently on a discount to net asset value (NAV) of 16% (very large by its history), although either of the US-listed closed-end funds would probably work as well.
| Fund | Total expense ratio | Listed |
|---|---|---|
| Exchange-traded funds | ||
| iShares MSCI Thailand | 0.63% | US:THD |
| Closed-end funds | ||
| Aberdeen New Thai | 1.80% | LN:ANW |
| Thai Capital Fund | 2.55% | US:TF |
| Thai Fund | 1.77% | US:TTF |
| Open-end funds | Minimum | |
| Allianz RCM Thailand | 2.43% | $5,000 |
| Amundi Funds Thailand | 2.13% | |
| Fidelity Funds Thailand | 1.99% | $2,500 |
| HSBC GIF Thailand | 1.84% | $5,000 |
| JP Morgan JF Thailand | 1.90% | |
| Lion Global Thailand | 1.68% | S$5,000 |
| Templeton Thailand | 2.59% | $2,500 |
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