OMGI’s Josh Crabb: A tale of two countries

Crabb Josh Old Mutual 2014

Asian markets have a habit of falling in and out of favour; when the time is right, investors should be prepared to go against the trend.

This year has been another eventful year for Asian equity investors. The effects of quantitative easing and lower bank funding costs have boosted asset prices, leaving valuations looking decidedly stretched in some areas.

Comparing the Indonesian and Thai markets sheds light on the regional differences some investors may overlook.

In the past few years the correlation between political stability and investors’ confidence in Thailand and Indonesia has been very clear. Most notably the bombings in Bali in 2003 and the political coup in Thailand in 2009 led to sharp losses in the equity markets owing to investors’ scepticism.

Investors can hardly have failed to notice that Thailand is being governed under martial law; and the potential of a power vacuum is ever present with concerns over the health of king Bhumibol Adulyadej. Political tensions in the country have led to a sharp decline in foreign tourism, which has had a direct impact on the growth of the economy. This will be magnified by recent issues in Russia which accounts for a significant level of tourist arrivals.

Another issue is Thailand’s debt profile, with the private sector debt to GDP ratio standing at about 150 per cent, compared with roughly 96 per cent before the global financial crisis.

The absence of a fully-functioning government increases the complexity of political intervention to stimulate economic growth.

Indonesia’s export economy is dominated by two industries: coal and palm oil. Export revenues from both have come under pressure from a generalised commodity price correction, but we believe the impact of the declines has probably bottomed; any improvement from here will do much to help Indonesia’s trade balance.

Indonesia is a major importer of crude oil, to the tune of approximately $12bn (£7.7bn) each year, and the Indonesian authorities have long subsidised the cost of oil in order to support economic growth.

With the cost of the subsidy determined by the price of oil on global markets, naturally the decline of  the oil price in recent months should reduce the burden. A reduced subsidy burden should in turn boost liquidity, liberate bank balance sheets and allow the government to permanently reduce the subsidy levels.

Elsewhere, Indonesia’s private sector debt to GDP ratio of 40 per cent (versus about 150 per cent in Thailand) highlights the relative financial health of its companies and consumers. Although Indonesia has not thus far benefited from the credit boom it is also free from the burden of the debt overhang that characterises Thailand.

Indonesia is reaping the benefits from new Indonesian premier Joko Widodo who has already shown signs of willingness to implement necessary reforms. These reforms will enable Indonesia to move up the value chain of economic activity, which should raise Indonesia’s profile as an attractive investment destination.

Stand-alone equity valuations in some parts of Asia appear to us to be relatively high and those in ASEAN are at the top of the range. There are of course exceptions, with Korea and China springing to mind. Nevertheless, developing a true understanding of the relative attractiveness of different markets can go a long way to helping investors profit from those investment opportunities that do exist.

Josh Crabb is head of Asian equities at Old Mutual Global Investors