The big news in Asia this week was Thailand’s election. I’m going to take a quick look at the result – and whether market’s optimistic reaction is justified.
I’m also going to discuss a currency question that several readers have asked in recent weeks: if a fund is available priced in sterling or US dollars, which should you buy? In fact, it doesn’t matter, as I’ll explain later.
And finally, I’ll be saying a few words about a possible Nestlé deal for a Chinese sweetmaker that shows just how attractive a promising consumer brand could be.
A resounding win for Thailand’s opposition
Thailand’s general election last weekend produced an unexpectedly decisive result. The opposition party, Puea Thai, won 265 seas out of 500, enough for an outright majority. Its prime ministerial candidate Yingluck Shinawatra is set to become the country’s first female leader.
Yingluck has never run for office before and was appointed as a candidate just a couple of months ago. However, she is not some kind of political prodigy. She’s the sister of controversial former prime minister Thaksin Shinawatra, who funded and ran Puea Thai’s campaign. He picked his sister as its figurehead.
However, Yingluck has turned to be an extremely adept campaigner, running rings around outgoing PM Abhisit Vejjajiva.
I’ve written about Thailand’s complicated politics several times before, so I won’t rehash it all here. But in summary, Thaksin is a billionaire businessman who realised that he could build a powerbase among poorer, rural Thais, who were neglected by the Bangkok elite. He promised them cheap credit, healthcare and education; they voted him into power in 2001.
Powerful figures in the royal family, the military, business and elsewhere didn’t care for Thaksin. They accused him of corruption, authoritarianism, lèse majesté (a serious criminal office in Thailand, where the king is revered) and other offences. Ultimately they deposed him in a coup in 2006.
He was later convicted of corruption and fled into exile in Dubai, from where he continues to play a huge role in Thai politics. A pro-Thaksin party that won post-coup elections in 2007 was pushed from power after its leaders were pursued on trumped-up charges and by protests organised by his rivals in late 2008.
This led to much horse-trading to form the outgoing Abhisit-led coalition. Now the public have again cast their votes for a pro-Thaksin party, which won’t please his rivals. So what happens now?
Optimism may be misplaced
The markets liked the result. The SET jumped almost 5% on Monday on optimism that all the recent problems are behind the country.
I’m not so confident. We’ve heard some conciliatory noises. The army has said it will respect the results of the election. Puea Thai has said it will not bring in a special amnesty for Thaksin (although it is talking of reviewing recent politicised cases). It intends to form a coalition, rather than ruling alone. And it has suggested that MPs who are also outspoken members of the pro-Thaksin red shirt protest movement – which occupied Bangkok last year – will not be part of the cabinet.
That may sound promising, as if everyone realises that the events of the last few years cannot continue. But it remains to be seen if this talk will add up to anything. Thai politics remains very divided.
On one side, Thaksin obviously wants to return home. It’s hard to believe that the current government will go a full term without trying to grant him some kind of amnesty. And whether in Thailand or in exile, Thaksin remains very active in politics. In many ways his influence is not helpful.
Many opponents believed his goal was to acquire the same long-term influence in Thai politics as other other Asian heavyweights such as Singapore’s Lee Kuan Yew or Malaysia’s Mahathir Mohamed. This may well be true, while the allegations of corruption and authoritarianism made against him are probably not without foundation.
But equally, Thaksin is genuinely popular with the electorate. As the chart below shows, Thaksin-backed parties have beaten the main opposition in every election (although note that in the 2006 snap election, the opposition boycotted the polls).
One can argue that he bought their votes with populist promises of handouts, but that misses the point: he paid attention to them when the country’s long-time rulers didn’t. To give some credit to the outgoing government, Abhisit and his ministers realised this and have adopted a more Thaksin-esque attitude to rural voters. But his government was tarnished by association with anti-Thaksin factions and couldn’t compete with Yingluck’s effective campaigning.
Many of the old guard don’t yet seem to recognise this. Until they begin to accept that the rest of the country wants to be heard and to receive some of the benefits of Thailand’s growth, this tussle between democratically elected governments and shadowy powerbrokers is likely to continue.
What has helped hold the country together is the monarchy. King Bhumibol Adulyadej is revered by almost all parties in the dispute. It’s clear that he personally dislikes Thaksin and may have tacitly okayed the 2006 coup – others in palace circles almost certainly did – however, this cannot be discussed in Thailand due to the country’s strict lèse majesté laws. Hence pro-Thaksin voters are generally not aware that he has been working against their votes.
While the king is alive, he is a unifying force. However, he is 83 and in poor health. The crown prince is widely disliked and probably cannot play the same role. So unless the divisions in Thai politics can be improved before the king passes away, there is a real risk of a crisis further down the line.
It’s not all bad news. The bloody protests in Bangkok in May 2010 were widely seen as a sign that Thailand needed to step back from the brink – and it has. Now a substantial popular victory for Yingluck is a clear sign of what people want and avoids a closed-door stitch up to keep the current government in power.
This could mark a step forward for Thailand. But there are still a lot of political risks here. Investors should avoid getting carried away until we see how things play out once the Thaksin camp are back in power.
Does the currency of your fund matter?
Moving on to my second topic, I’ve recently had a lot of questions about funds I’ve mentioned that are not priced in sterling. One example was the Lyxor Asian consumer staples ETF mentioned here: The most useful Asian ETF to add to your portfolio; another was the Aberdeen local currency short duration bond fund profiled here: A simple way to invest in Asian currencies.
Several readers have written to ask me whether buying a USD-denominated asset is a good idea if the dollar is likely to be weak. The answer is that it doesn’t directly matter. What’s important is not the currency that a fund is quoted in, but the currency of the underlying assets.
Why? Well, if you use sterling to invest in an asset denominated in Thai baht, you’re doing a straightforward transaction of GBP to THB. If you invest via a fund that is denominated in US dollars, which then invests in Thai assets, your transaction is GBP to USD and then USD to THB.
The key point to note is that if the USD then moves against GBP, it must also move against THB. Or alternatively GBP must move against THB. Or – and most likely in reality – all three currency pairs move against each other. The result is that what you ‘lose’ on one leg of the transaction, you ‘gain’ again on the other leg.
Why is this? Well, if this didn’t happen there would be an opportunity for arbitrage. You might be able to buy THB using GBP, for example, then sell the THB for USD, and finally sell the USD for GBP again to make a risk-free profit. The foreign exchange market is highly liquid, so any small opportunities like this that appear are traded away very quickly, keeping rates in line.
To give you an example using real numbers, back at the beginning of 2010, THB/USD was 33.37, USD/GBP was 1.617 and THB/GBP was 54. At the end of April, THB/USD is 29.99. USD/GBP is 1.644 and THB/GBP is 49.3. (These rates have changed a bit since I wrote this example, but it doesn’t affect the point).
So the proceeds of investing £1,000 directly into THB back in 2010 and converting back in April were (1000*54)/49.3=1095 – a gain of 9.5%.
Alternatively, if you took the route of investing in a USD-quoted fund that then invests in THB, your path is GBP->USD->THB->USD->GBP. The proceeds were (1000*161.7*33.37)/29.99/1.644=1095 – again a gain of 9.5%.
Obviously, this doesn’t hold if you’re talking about more complicated situations where currency hedges are involved at some point in the chain. But for a simple case where you are buying a fund that is denominated in a given currency, what actually matters is how the currency of the underlying assets moves against your domestic currency. What currency the fund is quoted in makes no difference to your returns.
In fact, in practice the vast majority of global foreign exchange trades take place using a USD leg in any case. So if you invest in the GBP class of a fund that holds THB assets, it probably converts your GBP subscription into USD anyway and holds them there before converting to THB for investment – and the same on the way back when you withdraw money.
So why do many funds offer a range of unhedged currency classes, rather than simply explaining that it doesn’t matter? I asked a few fund managers this recently – and “I’ve no idea, it never makes sense to me either” was a very common response. However, it turns out that this is mostly about marketing.
First, it makes dealing with the funds a bit easier for investors. Many people find it easier to deal with investments denominated in their home currency. They would prefer to see everything reported in the same form, rather than having to do currency conversions.
Second, it’s increasingly important for fund distribution. Many fund supermarkets – the big platforms through which ever-increasing volumes of fund sales take place – will only accept your fund if you have a sterling share class. If you don’t have one, you’re closing off crucial channels to investors and advisors.
Obviously, both of these may be reasons for you to pick one currency class over another. Most importantly, being able to buy the fund through a good fund supermarket/discount broker can save you a huge amount on fees over the long run. But don’t be put off a fund just because it’s not quoted in sterling.
Nestlé looks to buy into China
To wrap up this week, I wanted to bring your attention to the news that Nestlé is considering a bid for a Singaporean firm called Hsu Fu Chi, which makes cookies and candies for sale in China.
Hsu Fu Chi is scarcely a household name outside the mainland, but is a rather interesting business and some of you will already be familiar with it, since it was a recommendation to readers of my Asia Investor letter a year ago (it’s up about 70% since then). It’s been growing extremely quickly as Chinese consumers spend more on packaged snacks and is the market leader in its business segment – but the industry is still so fragmented that its market share is around 6-7%.
I think the long-run potential for firms like this in emerging markets is still underestimated. If the industries they operate in follow the same pattern we’ve seen elsewhere, they are eventually likely to consolidate to three or four dominant firms – and those with leading positions now are likely to be the long-run winners. The brands and distribution networks they are establishing now are extremely valuable.
Nestlé obviously feels the same. I’ve always suspected that Hsu Fu Chi and similar firms will be takeover targets for a multinational anxious to break into their markets, and this confirms it.
From an investment point, I’m not sure this is a good development. I would rather be able to buy pure exposure to a great emerging market story than have it wrapped up as part of a multinational. But it will be interesting to see if any deal emerges – and what premium a knowledgeable buyer will be willing to pay for a company like this.