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Emerging Markets: When They Crash, They Crash Hard and Fast

Today I want to share with you one of the lessons you must learn and understand before setting foot in any emerging market.

I learned this lesson first hand on my trip to Hong Kong in 1997 for the handover of Hong Kong from the British to the Chinese.

That day, July 1, 1997, was hot and steamy in Kowloon. But as you’ll see in this excerpt from my book, Where in the World Should I Invest?, economically speaking, things were about to get much, much hotter. Enjoy!

The First Domino

I can remember it clearly. I was in my hotel room at The Regent in Hong Kong (now the Intercontinental), when the news of the collapse of the Thai baht came on the TV. It fell by more than 20 percent in one session, and what was once thought to be a localized currency issue for Thailand (the actual crisis for the currency began in May of 1997 when Thai banks came under speculative attacks by investors and Singapore came to its aid), turned out to be more than that.

For years prior to the collapse of the baht and the Thai economy, the country’s banks had loaned out billions to the investment community fueling a speculative bubble, especially in real estate. When that bubble burst, much the like it did in the United States during the period from 2007 to 2011, the markets broke under the weight of bad loans and insolvency of the banks.

The crisis spread to the rest of Asia and when it was over, many countries found themselves debtors to the International Monetary Fund, which bailed them out to the tune of $40 billion, upon promises of strict austerity measures.

Thailand and much of Asia suffered several years of depressed economic growth until rebounding in the early part of the next decade. Recapitalized and with stricter lending standards in place, the Thai economy rebounded and the country went back to worrying more about politics. During the crash, it was not difficult to buy Thai equities, as well as those of Indonesian and Filipino countries, for discounts approaching 70 percent.

If there is a lesson to be learned about emerging markets, this is it: When they crash, they crash hard and they crash fast. Liquidity dries up overnight and market routs are the norm. That is the time to buy.

Today, Thailand is growing its GDP at a 4 percent annual rate. It’s been doing so, on average, for the past five years. Per capita income is between $5,000 and $6,000 depending on the source you use. That puts Thailand far ahead of countries like India, China, Vietnam, and Cambodia but still not even close to developed nation status.

But, and this is a big but, the black market is rampant in Thailand, Bangkok in particular, and many transactions are done in cash with no trail for the tax collector. It is the same for most emerging market countries, and it is problem that will plague them for decades to come. Corruption is rife in Thailand and it comes from the top. Corruption in recent times hit its highest level under the first Shinawatra, with kickbacks of 5 percent or more on projects being the normal starting point.

Thailand’s population base of some 67 million and its strategic location as a developed cargo port and hub have allowed it to become a substantial trading partner (in Asian terms) with many of the neighboring countries. Thailand’s major export is rice. While not even close to being the largest producer (China and India are the two biggest, but most of it is for local consumption) it accounts for more than 28 percent of the rice exported globally. Tourism is extremely well developed and Thailand’s beaches and islands are world famous for their beauty and resort accommodations.

Investing in property and property-related companies has historically provided the best investment gains in Thailand, followed by the bank stocks, telecom stocks, cement stocks, and food companies. Thailand is also one of the largest producers of after-market automobile and electronics parts, but those businesses are highly commoditized and face major competition from other Asian countries.

In truth, the type of companies that you want to invest in are those that serve the local market. Thai company shares are not hard to purchase, and some trade as American Depositary Receipts in the United States. But, as with every other emerging market, you are better off waiting for a crisis in Thailand and buying a Thai Fund such as the Thai Capital Fund (NYSE: TF), Thai Fund (NYSE: TTF) and the MSCI Thailand Investable Market Index Fund (NYSE: THD).

My rule of thumb is to start buying in tranches when the discount to net asset value (for TF and TTF) increases to over 25 percent – it’s like buying a dollar’s worth of shares for 75 cents or less. You can get quotes for the net asset value and the discount to that value by visiting the Closed-end Fund Association website.

Witnessing the collapse (and now regrowth) of the Thai economy first hand was an experience that’s contributed invaluably to my investment strategies and to my understanding of emerging markets.

In particular, it gave me insights into the strength, weaknesses, opportunities and threats that are local to Thailand and that any investor should consider while planning to invest in its market. In Where in the World Should I Invest? I go into detail about these and other considerations. Pick up a copy by clicking here.

Ahead of the tape,

Karim Rahemtulla