Forecasts and predictions are tough in any business, but politics is possibly tougher than most to divine the outcome of future market events, even in this modern age. In the run-up to many elections—the recent British election, for example—there has been conflicting evidence to the clear consequences to come only after the final count is completed. Another challenge is that no one announces an upcoming coup or advertises planned political unrest, and it is never clear how long the status quo will persist. Politics are important as it can materially impact investment returns. But outside of the shrieking headlines, is the long-term impact possibly less significant than one might suspect?
Thailand is a fine starting point. Over the past century, Thai politics has been more colorful than most. The absolute monarchy was abolished in 1932 and since then the country has had 25 general elections. It has also had 19 coups d’état, of which 12 toppled the governing powers. In spite of this tumultuous political history, the country is one of only a few in the world to never have defaulted on its sovereign debt. Two of Thailand’s more recent coups happened in the past 10 years. And rather surprisingly, over this time, the market has performed rather well. In fact, despite its history of repeat coups—more than any other Asian country—Thailand’s stock market and investor returns have, in reality, seen virtually no impact over the medium term from such arguably “extreme” political activity. Including dividends, the Stock Exchange of Thailand Index has risen more than 300% in U.S. dollar terms over about the last decade. In this same period, the S&P 500 Index increased 120%.
Today, Thailand’s military is in power once again. The investment community appears relatively unconcerned by the situation. King Bhumibol Adulyadej is now 87 years old and struggling with poor health. He has served as Thailand’s revered monarch for almost 70 years and the successional transition might be tougher than many expect. The transition from military to civilian rule too may not be as smooth as is widely expected.
Myanmar and Singapore in the 1960s
An investor would have faced issues some five decades ago by comparing the two former British colonies of Myanmar (formerly Burma) and Singapore. At the start of the 1960s, Myanmar was one of the world’s largest rice exporters, hence the nickname the “world’s rice bowl.” About the size of the state of Texas, it had a population at the time of nearly 25 million. By contrast, Singapore was a swampy little island off the southern tip of what is now Malaysia with no natural resources and a population of a mere 1.9 million. At that time, in terms of raw potential the investment decision was a “no brainer.” Texas-sized Myanmar was a respected exporter of agricultural produce and with its relative land size and population advantages, the country had obvious potential. However, an investment decision would have been complicated at that time as both countries had political problems; in 1965, Singapore become the first country in modern history to unwillingly become independent when it was expelled from the Federation of Malaysia. Prime Minister Lee Kuan Yew tearfully shared the news via a televised press conference that Singapore was a sovereign, independent nation. Myanmar, on the other hand, was ensconced in military rule after the 1962 coup by General Ne Win, and its policies sought to reorient the economy to a socialist one. Foreign aid organizations were kicked out, companies nationalized and many freedoms greatly curtailed.
Factoring in political backdrops can make any investment decisions much more complex. Today, Myanmar has nominal GDP per capita of US$1,221 while the equivalent for Singapore is more than 46 times higher at US$56,319. Interestingly, Ne Win ruled the country for 26 years while Lee Kuan Yew was at the helm for 31 years, and each man’s political ideology and actions materially shaped the fortunes of both nations.
The development of these two states and the divergent outcomes for their populations—albeit extreme—drive home the importance of understanding political environments. Per capita income in Singapore is now higher than it was under its colonial rulers while in Myanmar most stakeholders have languished over this period. Clearly, this political reality unfolded over an extremely long time horizon, much longer than that of most portfolio investors. And this is one of only a few extreme cases in Asia, as on the whole, political impact is far more marginal.
But political changes can also be short and sharp, although frequently still be very difficult to predict. Recalling back more recently, elsewhere in the region, to the events of the 2014 elections in India, the consensus view was initially that reform-minded Narendra Modi would likely win, but with no majority. A cumbersome and unwieldy coalition was widely expected. When the results were finally tallied some months later, it became clear Modi had won a historic victory and investor sentiment toward the country turned extremely positive. Money flowed in strongly as the currency rebounded, delivering outsized returns over the following 12 months. The election outcome was tough to predict as was the extent of the investor exuberance over the Modi victory. The market’s recent enthusiasm has made valuations less attractive, but the long-term prospects remain striking. The potential for growth is significant in India, but so are the challenges faced by Modi’s regime.
Opaqueness, duration and severity of political changes are a very real challenge for investors as we need to try to gauge what will unfold nationally over the long term and what impacts market sentiment will have over the shorter term. Consider the most recent election in Sri Lanka. The incumbent, Prime Minister Mahinda Rajapaksa, surprised the markets when he called for an early election—nearly two years before the end of his scheduled term. Rajapaksa had been in power for a decade, and along with his three brothers, controlled most facets of Sri Lanka’s government as together they held the posts of minister of finance, minister of defense, minister of economic development and obviously also the position of prime minister. The early election result was expected to be close but seemed to be a foregone conclusion—except that Rajapaksa lost. Now everything has changed. The new party is off to a rather disappointing start, announcing a shareholder unfriendly 25% retroactive corporate tax within days of winning the election. Expect less decisive decision-making and a period of economic stagnation while the new players establish their territories and we await a new round of parliamentary elections.