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The Global Capitalist: Pilot
The (Long Awaited) Inaugural Newsletter...
Welcome to the inaugural letter of the Global Capitalist: A weekly newsletter on all things emerging markets. Before I continue, I should warn you that I am not a writer so please bear with me as I get the hang of it. My goal for this letter is to inform the reader of the stunning growth that occurs on a daily basis across the globe. I previously wouldn’t expect you to care about how much the Egyptian Pound is worth or why Brazilian - Chinese trade matters to us. That said, living in a globalized society means that these things matter more than they ever have. They affect our jobs, portfolios, and costs of goods and services. All in all, this stuff matters and will continue to matter as our world becomes more interconnected. In the meantime, I will be learning about these topics with you as I go along.
Every week you will receive an email from me featuring a different geographic region. Within those geographic regions, I will feature a handful of different countries that qualify as emerging markets. I will be sharing news, data, and stories from a handful of different countries sourced from digital news outlets from across the globe.
This week I’ve decided to focus on the Asia-Pacific region.
YTD EM Performance (Data from Koyfin Markets):
Emerging Market Agg. (EEM): -25.67%
South Korea (EWY): -27.14%
India (EPI): -35.88%
Russia (RSX): -35.00%
China (FXI): -17.26%
Mexico (EWW): -38.00%
Brazil (EWZ): -49.86%
I welcome feedback at email@example.com.
Why should we care about emerging markets?
The More the Merrier:
The People’s Republic of China has over one hundred cities with a population north of one million people. The Republic of India has approximately forty-six cities with over one million people. Mexico City, the capital of our southern neighbor, is the largest city in the Western Hemisphere with nearly nine million people. By the year 2050, Nigeria is expected to be the third most populous country in the world with over four-hundred million people.
For context, the United States has just ten cities with over a million people. Despite being the third largest country in the world by population, we are still about 25% the size of India and 20% the size of China. The bottom line is, there are a lot of people out there. These people are not just simple statistics. These people are employees, employers, consumers, and decision makers.
Let’s talk about growth bay-bee, Let’s talk about G, D, P:
GDP, or Gross Domestic Product, is a measure of all of the goods and services produced in the country for a year. It it often used as a barometer for economic growth.
For the year 2018, the United States ranked 103rd in the world when it came to GDP growth. That’s not to say the U.S. has lost its luster (The U.S. GDP grew 2.9% in 2018 and is still the world’s largest economy.) Rather, advancements in technology, infrastructure, and personal liberties have created opportunities across the world that previously had not been available. That said, the emergence of this new globalized world market has opened the door for investors, corporations, and governments to capitalize on these budding economies.
Who finished first in GDP growth for 2018?
Answer at the bottom.
Who are we talking about?
Multinational corporations (think Disney, Apple, Nike) that operate in hundreds of countries across the globe. These companies have seen enormous growth within their domestic markets, yet seek to capitalize upon the opportunities evident in the world’s largest and fastest growing markets. For context, the Chinese economy is valued a little over $25 trillion in U.S. dollars. Specifically, Nike sold roughly $1.68 billion dollars of goods in China, a 22% increase from the year prior.
With Great Revenues Come Great Risk:
Companies have been elated with the growth in their international segments since the beginning of the 21st century. However, the diversification of revenue streams also means exposing your firm to a myriad of different risk factors.
Political Risk: The risk of an unsophisticated or corrupt government and its legislation affecting markets and commerce within the nation.
Think: Turkey, Venezuela, Iran.
Currency Risk: The risk that the fluctuations in a nation’s currency may adversely affect market performance of securities or a business’s operations in a foreign country.
Interest Rate Risk: (the cousin of currency risk…) The risk that monetary policy may adversely affect the capitalization or capital expenditures of a company or the strength of the domestic currency.
Liquidity Risk: The risk that a country’s capital markets may not be able to convert a security into cash without realizing a sizable loss.
Food for thought: What type of risk category would a global pandemic fall into?
(We promise to talk about things other than COVID-19… Answer will be at the bottom.)
Year of the Rat
Where to begin…
China announced on March 19th, 2020 that, for the first time in 2020, there were no newly reported cases of COVID-19 in Hubei, the province where Wuhan is located. This progress against the virus stems from China’s heightened efforts to stop the spread of the virus through autocratic measures such as closing businesses, spraying down streets with disinfectant, and tracking the location of their citizens. Reuters reported that Chinese officials do not believe they will reach their original GDP target of 6% - although they are confident it will grow “around 5%”. Critics of China (mainly Americans) argue that the government is purposely doctoring numbers to dampen any anti-Chinese propaganda. Consequently, the People’s Republic of China has now expelled American ex-pat journalists from stalwart publications such as the Wall Street Journal, Washington Post and the New York Times.
Empty streets in Wuhan, China
After successfully brokering “Phase 1” of the U.S. - Chinese trade war, the Chinese Communist Party (CCP) finds itself back in the cross-hairs of the the Trump administration. On March 2nd, President Trump reduced the allowable amount of Chinese state-owned media members to 100 people. For context, there are now approximately 160 members of Chinese media outlets granted access to White House pressers. While the U.S. does not plan to put any restrictions on what these outlets publish, this adds to a lengthy list of U.S. vs. Chinese bouts that have been present throughout Trump’s term . Given the implications of COVID-19’s hindrance on the economy, we may see some more conflict brewing between these two economic powerhouses…
We brought up earlier that despite all else, China still estimates a 5% growth in GDP for 2020, a notch down from their original target of 6% and overly pedestrian relative to recent memory. While overall China has seen a promising shift towards normalcy, segments of China’s economy have much longer ways to go. The Chinese box office in particular has been a laggard for the global economy as multinational juggernauts like Sony Pictures and Disney rely upon the massive Chinese market to bolster movie ticket sales. For instance, Avengers: Endgame, the highest grossing film in box office history made $614 million of its $2.1 billion total from China. In contrast, China’s own communications powerhouse, Tencent Holdings, has seen an healthy bump in video game sales as Chinese consumers elect for indoor experiences rather than outdoor. That said, Tencent’s multichannel media strategy will be tested during the COVID-19 pandemic. Outside of just video games, Tencent has verticals in music and cinema which have been throttled by the pandemic. Investors will be curious to see if their more introverted business lines will buoy earnings when they announce in May.
Gooooood Morning Vietnam!
“Vietnamization” was a term popularized during the U.S. - Vietnamese War that reflected America’s futile war efforts and frustration with the South Vietnamese government. Today, the term carries a more positive tone as Vietnam ranked 12th in the world for 2018 GDP Growth with 7.1%. This comes at little surprise, as Vietnam has successfully averaged a 6.28% annual GDP growth rate since 2000. Similar to China, Vietnam operates under a communist government yet reaps the benefits of a market economy.
Revisionist History: Which popular DC Comic is known for its rugged portrayal of the US - Vietnam War? Answer will be at the bottom.
Vietnam’s ascent from third-world agriculture economy to a booming emerging market originates from the Vietnamese government’s concentrated effort to attract foreign capital or foreign direct investments (FDIs) from economic powerhouses. Tax breaks, trade agreements, and favorable geography have been the thesis behind an inflow of $22 billion into the Vietnamese economy as multinational corporations seek refuge from the risks of doing business in China. Companies such as Google, Apple, and Samsung have shifted portions of production to the Southern Asian nation as doing business in China has been unreliable as of late. Interestingly enough, the largest contributors of foreign capital come from the Asian region, with South Korea and Hong Kong leading with nearly $16 billion deployed. American multinational corporations are slower to move as there are still concerns about disrupting the relationship with the Chinese government. That said, recent stoppages from the Coronavirus have strained the supply-side capabilities in China. In addition to trade war tensions, the virus could potentially catalyze a strategic pivot towards Vietnamese producers. That is not to say that Vietnam’s supply chain has been unaffected from COVID-19. For instance, the South China Morning Post reported that the flagship Samsung plant in Thái Nguyên was supposedly operating at 50-80% capacity. Although Vietnam has taken proper steps to corral the spread of COVID-19 in their country, time will tell whether or not their red-hot economy can weather this storm.
Samsung Electronics’ factory in Bac Ninh, Vietnam
While the Vietnamese have previously had no issue offering enticing incentives to foreign investors, a new wave of nationalist politics and a corona-infested economy has tilted the business landscape in the favor of domestic companies. As a communist country, Vietnam holds ownership across a multitude of businesses known as state-owned enterprises or “SOEs”. For example, Viettel, one of the largest telecom companies in Vietnam, is fully operated by the Ministry of Defense. Viettel found itself in the headlines this week as one of the domestic Vietnamese companies that is looking to catapult itself ahead of its foreign competitors by rolling out 5G services. This marks an impressive feat for Vietnam as Viettel becomes the sixth telecommunications firm to successfully develop 5G technology, beating all U.S. based tel-cos. Despite the recent success of the SOEs, Vietnam also has been making an effort towards privatizing over one-hundred of these enterprises to liberate their economy and boost growth. While these efforts have been futile, (only 27.5 of their targeted divestitures have happened) the Vietnamese government remains committed towards cushioning domestic enterprise. With an election year looming on the horizon, it will be interesting to see if any progress is made amid the COVID-19 crisis…
Cooler than K-Pop
As the global economy appears to plummet into turmoil, South Korea remains a beacon of hope among a sea of despair. In a country of fifty-million people, South Korea has been the poster child of coronavirus ‘risk management’ as the country has successfully executed a nationwide quarantine and has tested nearly four-hundred thousand people. The country boasts a testing capacity of twenty-thousand people per day with results received in 24 hours or less. At its peak at the end of February, South Korea saw over nine-hundred new cases a day. This past Sunday, March 22nd, only sixty-four new cases were reported. While they are not quite out of the clear yet, the country has seen remarkable progress in tackling the disease. Historians argue that South Korea, like Taiwan, holds a vivid memory of the damage that a viral respiratory infection can deal on a country from the SARs outbreak in the early 2000’s and the MERS outbreak in 2015.
Contrary to their Chinese counterparts, South Korea did not want to employ autocratic measures in order to reduce the spread of the disease. Instead, South Korea relied upon its public healthcare system and citizen’s support to tackle the issue.
Risk Management: South Korea sprung to action immediately after the first patient was diagnosed. Government officials met with medical supply companies to inform them about the looming increase in demand. On top of that, South Korea opened six-hundred new testing centers to accommodate the incoming volume of infected people.
Test, Test, Test: No country can sniff the amount of tests that South Korean health officials have administered. With nearly four-hundred thousand tests given, testing is quick and easy (although uncomfortable) and results are given within 24 hours.
Technology: A country renowned for its roots in mobile technology, South Korea has certainly taken testing into the 21st century. Citizens are enlisted in a GPS-based system which sends out a mass text message when a case is reported nearby. If infected, citizens must download a different GPS-centric app that allows health officials to track isolated patients and levy fines against them if they leave isolation. Lastly, many buildings have been equipped with body-temperature scanners that indicate whether or not a person may be showing a fever.
Civic Duty: The Korean government deployed witty public service campaigns urging people to stay home. For instance, the city of Seoul has been peddling the slogan: “Let’s Take a Break from Social Life” as the metropolitan region of over 25 million people hopes to put a stop to the spread of the virus.
South Korea’s success with handling COVID-19 may not exempt them from the full toll this virus may cause. A global recession is still a primary concern for many South Korean businesses as companies such as Samsung struggle to maintain their supply chains. So far, sensational South Korean pop group BTS has thankfully not cancelled nor postponed their North American tour… Although it is likely to be pushed back.
Asian Invasion: BTS is one of two South Korean exports to be nominated for an EGOT (Emmy, Grammy, Oscar, Tony), who is the other? Answer at bottom.
Start Your Engines
There is some monetary jargon in here so a quick couple of definitions: To peg a currency means to tie the value of a currency to something else (I.e. Gold, USD). The opposite would be to float the currency which ties the value of said currency to supply and demand.
If you have been on Instagram the past few years, chances are you’ve scrolled past a few posts from friends vacationing in Indonesia. For good reason, too! Indonesia is known for its beautiful beaches, diverse culture, and rich history. Located just south of Singapore and north of Australia, Indonesia boasts the title of largest economy in Southeast Asia and the largest Muslim-majority country in the world. Globally, Indonesia checks in with the 16th highest nominal GDP and the 4th largest population, right behind the United States. Interestingly enough, Indonesia’s mercurial growth stems from their political and economic collapse during the 1997 Asian Financial Crisis (also known as the Tom Yum Goong Crisis in Thailand, we’ll get to that another week…) The 1997 crisis severely buckled the economies of many Southeastern Asian countries including South Korea, Thailand, and Hong Kong, among others as these nations suffered from speculative bets on monetary policy. Indonesia specifically suffered from a bout of hyperinflation as the rupiah, the country’s domestic currency, plummeted in value following Bank Indonesia’s decision to float the currency. Meanwhile, Indonesia’s private sector had previously made a habit of borrowing in U.S. Dollars as the rupiah was once appreciating against the Dollar. This allowed for private corporations to grow their balance sheets and service their debt obligations at a cheaper real rate. The crisis appeared to find its floor in 1998 as GDP sank -13.5% and the rupiah inflated by 65%. Mass food shortages, high unemployment, and violent riots ultimately ousted President Suharto from office after a controversial thirty-one year reign as leader. The International Monetary Fund came in with a rescue package of $43 billion as they sought to reignite the Indonesian economy and instill confidence back into the rupiah. The years thereafter were underscored by further turmoil as Indonesia faced bank runoffs, 5 different presidents from 1998-2004 and devastating natural disasters. Indonesia returned to its prosperous ways towards the turn of the decade as inflation finally sunk below 5% and GDP growth hurdled 6%. Since then, Indonesia has seen an explosion of FDI into the country with a net equivalent of ~$2 billion in 2010 to a high of over $30 billion in 2018. While Indonesia has strong foundations in manufacturing, mining, and agriculture, Indonesia’s tourism industry has been the fastest growing sector of their economy.
Buddhist Temple in Borobudar, Indonesia
Indonesia’s tourism industry has skyrocketed in the past decade, punctuated by a staggering 16 million foreign visitors in 2019. While the final number fell short of the Indonesia’s goal of 20 million visitors, the increase from a record-breaking 2018 indicates the country’s continued focus on tourism which grew 7.8% in 2018, twice as fast as the global average. President Widodo, who won re-election last year, has thrown his support behind the tourism industry with a new project titled 10 New Bali. The project focuses on diversifying Indonesia’s tourism industry and alleviating the burden on island of Bali as they shoulder a majority of tourist traffic. Tourist attractions such as Lake Toba, Mandalika and the Borobudar Temple (pictured above) have been the focus of this promotion, although seven more destinations are featured in the proposal- hence the name, 10 New Bali. Infrastructure projects such as new roadways, expanded airports, and even a racetrack are underway to attract newcomers and buttress the volume of visitors coming to the islands.
All that said, the revamped Indonesian economy faces it’s biggest obstacle as COVID-19 has sunk its claws into global tourism. Balinese hotels report occupancy rates below 20% while new reported cases climb daily. Also, President Widodo’s goal of 20 million visitors is jeopardized once again as the country reluctantly suspended their “visas-on-arrival” policy which has been a convenience factor that lured tourists from across the globe. Lastly, the Indonesian government has also announced stimulus equivalent of $237 million to local cities and governments while offering tax holidays for local businesses adversely affected by the virus. This should help those business owners and economies, but unfortunately it will almost certainly devastate Indonesia’s tourism industry.
What I’m Reading/Watching:
I figured we all have a lot more free time our hands so here are some things I’ve been reading and watching:
Reading: What I Learned Losing a Million Dollars by Jim Paul. The story of a commodities trader which documents his dynamic ascent and eventual crash of his career.
Reading (blog): A Wealth of Common Sense by Ben Carlson. Reassuring charts, stories, and data to keep us grounded in times of uncertainty.
Watching (movie): The Invisible Man featuring Elisabeth Moss. It was in theaters, now on-demand. It’s a thrilling psychological twist on an old story.
Watching (show): Westworld Season 1. If you like Sci-Fi and Anthony Hopkins… Look no further.
GDP Growth Champion 2018: Libya, with 17.9% GDP growth.
Food for Thought: A global pandemic would fall under Tail Risk or Black Swan Risk, a term popularized by bestselling author: Nicholas Nassim Taleb.
Revisionist History: Watchmen by Alan Moore was a popular DC comic best known for its critical portrayal of Richard Nixon and the Vietnam War.
Asian Invasion: Bong Joon Ho’s Parasite was nominated for 6 Oscars and took 3 of them home, including Best Picture.