Investment Idea :
Take a Long-Term View Amid Short-Term Turmoil


          Recent events such as the US economic slowdown, the subprime mortgage securities crisis and a widening global credit crunch have some investors worried about investing in the stock market. While, it's important not to underestimate the seriousness of these events, global equity markets are no strangers to turmoil, having endured many unsettling events during the past 35 years such as the OPEC oil embargo in 1973, the first Persian Gulf War in 1990, the Asian Financial Crisis in 1997, SARS Outbreak in 2003 and the latest and still on-going event is the Subprime Mortgage Crisis in 2007. (Please see Chart 1 below)

          Global stocks have proven to be resilient over the long term as per the example below. There are two key factors to successful investing; the first is to invest for the long term and ignore the short-term turmoil. Admittedly, this is easier said than done and it's quite normal for many of us to have the occasional sleepless nights worrying about market gyrations. Secondly, make sure that your portfolio is properly diversified. A hypothetical portfolio assumes that by investing USD 10,000 in a diversified mix of global stocks by using the MSCI EAFE Index (Europe, Australasia, Far East) from the start of 1973 would be worth USD 360,000 at the end of January 2008, a whopping 3,600% return over a 35 years period. This is assuming that all dividends have been reinvested, and does not include taxes, fees or inflation.

Chart 1

          Many economists still continue to argue about whether or not emerging economies (Thailand included) will follow the US into recession. On the one hand, many would argue that in an era of globalization, economies have become more intertwined through trade and finance, which makes business cycles more synchronized, not less. And let's not forget that the size of US economy is by no means small at USD 14 trillion or three times bigger than the economies of India and China combined. And when the US slows down, it is unlikely that there will be no impact on the developing countries, especially now that their exports have increased from just over 25% of their GDP in 1990 to almost 50% today. Yet recent data suggests that GDP-growth rates of developing countries will slow by much less than in previous American downturns.

          One reason is that exports from the emerging economies to the US have declined substantially over the past 5 years while trades within the emerging economies have been on the rise. China's growth in exports in dollars term to the US slowed to only 5%, but exports to Brazil, India and Russia were up by more than 60%. In fact, 50% of China's exports now go to other emerging markets. The four biggest emerging economies, which account for two/fifths of global GDP growth last year, are the least dependent on the US: exports to America account for just 8% of China's GDP, 4% of India's, 3% of Brazil's and 1% of Russia's. Surprisingly, over 95% of China's GDP growth of 11.2% in 2007 came from domestic demand.

          Secondly, domestic consumption and investment in many emerging markets are holding up quite well. In addition, these investments are not purely in the export sectors. Less than 15% of China's investment is linked to exports. Over half is in infrastructure and property.

          Admittedly, a severe recession in the US could still have a nasty impact on the developing world and a sharp fall in the dollar could also further squeeze emerging economies' exports, but this time around, emerging economies are in a much healthier position and should be able to use monetary and fiscal policies to cushion their economies. Unlike during the Asian financial crisis in 1997, many emerging economies were net foreign borrowers and capital inflows tended to dry up during global downturns as foreign investors shunned risky assets. This forced governments to raise interest rates and tighten fiscal policy. But most developing countries now have a current account surplus and large foreign reserves, leaving ample room for a fiscal stimulus if necessary. In fact Thailand's foreign official reserve breached the USD 100 billion levels for the first time in 2008.

          In conclusion, the outlook for the global economy will still be pretty uncertain over the next couple of months but if history were any guide, it would be unwise to change horses in midstream. The old advice about NOT keeping all your eggs in one basket is as true as ever and I strongly urge the readers to take the long-term view amid short-term turmoil and diversify.