Readers’ Questions Answered Part V
Here are my responses to recent questions from readers.
1) Many IPOs tend to have a small initial surge and then taper off for a period of time. Stock sales seem to be driving the IPO thinking, do you think these companies have plans to manage growth and incoming capital, to avoid the company stock tapering off?
– Russ, Canada
The initial public offering (IPO) and secondary issue activity in emerging markets has accelerated as a result of the higher prices for emerging markets (EM) stocks. In 2009, about US$240 billion in IPOs and secondary issues were made in emerging markets. This year, we expect that amount to potentially double. Raising capital in such instances is often opportunistic. These companies may feel that when stock prices go up, it is a good idea to raise money, even though they may not have a specific reason other than to “pay off loans” or “strengthen the balance sheet”. In some cases, additional capital is not needed and tends to dilute earnings. This is why stock prices often taper off after an IPO or secondary issue.
2) Within emerging markets, have you noticed a greater value in investing in private, non-listed entities despite their illiquid nature? It appears that many opportunities in emerging markets are outside of the realm of the listed space. Would investing in a quality private company in its growth phase – if managed well – provide equal, if not even better returns?
– Richard, South Africa
There are many opportunities to invest in non-listed entities and we have been doing so through various strategies very successfully. While the potential upside can be quite high, investments in such private equity investments require investors to stay committed for at least five years, during which they can’t withdraw their money. This is unlike listed stock investments where investors can buy and sell at any time. The kind of investment strategy that one should follow would depend on the individual’s financial commitments and risk appetites.
3) What will China look like economically and politically in the next 20 years? Do you think that China will start out like Japan over 25 years ago when the press was concerned with “Japan Inc.” or do you think a different path is in store for China?
– Edward, USA
In the next 20 years, China should be a significantly different country with a standard of living much higher than what it is today. The world is positive about the country’s rapid growth and how “China Inc.” is beginning to dominate in many economic spheres. So in that sense, China will be no different from Japan. The difference, however, is that China has a vast domestic consumer market and they are not as dependent on exports as compared with Japan. Also, China’s influence on the rest of Asia will likely be greater than Japan due to the large number of Chinese expatriates and the increasing investments China is making in the region.
4) Can you comment on Thailand & Indonesia? Are the market valuations of these countries too high to invest now?
– Lynn, Taiwan
Both countries have done very well in the last 12 months. Despite the rising overall market returns we are still finding good value opportunities at the individual company level in both countries. I have also mentioned recently that Indonesia’s natural resources and large population put it in a positive position to attract investments and build a strong economy.
In Thailand, good buys remain even with the recent surge in share prices. Having invested in the country for more than 20 years, I have reasons to believe that Thailand can weather their ongoing political issues and continue to be an attractive investment destination.
5) What is your take on the Sri Lankan market and specifically, the banking sector?
– Moshe, Israel
Sri Lanka is now recovering from the long war against the Tamil Tigers and is well on its way to a more stable political environment. The Colombo Stock Exchange (CSE) index has nearly doubled this year. Economic growth is expected to be strong, with GDP forecasted to grow 5.5% in 2010 and 6.5% in 2011. Strong capital flows, growing foreign reserves, low inflation and high tourism potential should further support the economy. However, the government needs to focus on reducing its budget deficit and debt levels.
I believe there are opportunities in the banking sector that are worth looking into. The banks have not reached out to the entire population yet and a number of banking products such as credit cards could be expanded.