Banking on Fast-Growth Emerging Economies

Jeff Opdyke (March 5, 2013)

My cabbie turned off the otherwise barren freeway and the full force of Bangkok exploded.

Even at 1 a.m., Thanon Sukhumvit Road was jammed with cars and delivery trucks. The night vendors grilling and frying their meats, fish and vegetables consumed nearly every square inch of sidewalk, and people milled around eating food on a stick or out of paper cones. I rolled down my window to take in the warm Thai night, resplendent with the smells of tropical Asia – charcoal, durian, exotic spices, petrol and
exhaust.

I was back in Thailand to attend the wedding of one of my long-time Wall Street Journal buddies. We grew up at the paper together and though we’ve been separated by the Pacific Ocean for nearly a decade, we have remained close. As my cab navigated Bangkok, I sunk into my seat and closed my eyes, content to again be back in a part of the world that feels so alive and so comfortable to me.

I say this every time I land in Asia: Until you visit this place, you simply have no clue what growth is about. Growth in infrastructure, growth of the economy, and growth of the middle-class consumer population I routinely write about. And I often give investment recommendations based on the products that consumers are buying.

But there is an even purer play on the growth of emerging nations like Thailand … and that’s today’s lesson.

Every economy lives and dies on the money that flows through the businesses, households and government sectors. In a biological sense, money is the lifeblood of every economy. And in that analogy, banks are the heart that pumps the money through the system.

Thus it is, then, that the purest way to participate in any economy is through the banking sector.

That’s particularly true with emerging and frontier nations. Their economies are growing quickly – three, four, even 15 times faster than America and the West – and all the cash they generate ends up flowing through local banks. Given that the business of banking is to skim off profits with every dollar that comes through the door, the increased cash flow generated by a rapidly growing economy means rapidly growing revenue and profits for the local banks … and that ultimately means a growing stock price.

That was the rationale for steering subscribers of my Emerging Market Strategist investment service into Krung Thai Bank, one of Thailand’s leading local banks.

From my years of traveling through Asia as a financial reporter and an investor, I’ve had a keen interest in Thailand. The economy is one of the most important in Southeast Asia, and though the place seems to have a coup every other Tuesday, the political and social climate is fairly benign.

The Thai population, meanwhile, is growing increasingly prosperous as the Thai economy ramps higher on the back of agriculture (the country is a global leader in commodities like sugar, rice and tungsten) and manufacturing for products like cars, auto parts and appliances. Indeed, the Thai economy notched a stellar 6.6% GDP growth rate for 2012.

And Krung Thai Bank benefited from that as investors rushed into the shares.

My subscribers owned the stock for just two months, and exited with a near-40% gain.

The Next Krung Thai Could be … Absa Group

Like Asia, Africa is loaded with fast-growing countries, too. As such, it’s a continent where savvy investors should have long-term exposure to the expanding GDP.

I know from conversations I have that much of the continent scares investors, though the reasons for those fears – famine, pestilence, genocide, war, etc. – either no longer apply or are rapidly waning. Nevertheless, there is an entry-level way into Africa … South Africa.

The country keeping the bottom of the continent from slipping into the Indian Ocean is the most-advanced economy in all of Africa. For that reason, South Africa is the launching pad for companies from the U.S., Europe, China and the Middle East that want access to the fast-growing consumer population in sub-Saharan Africa.

Thus, the South African economy, growing at about 2.5% today, is expected to ramp up toward 4% annual growth by 2015. The banks will clearly benefit.

One of the top banks locally is Absa Group – one of South Africa’s “Big Four” consumer banks. (The company is also a leading player now in Nigeria, where it took over operations from Barclays Africa … and Nigeria’s economy is on pace to supplant South Africa in the near term, giving investors an even stronger reason to own Absa’s shares.)

The shares currently trade at a P/E ratio about 14 – not cheap, but not expensive when you consider that earnings (the E in the P/E ratio) should grow between 25% and 30%. So this is a growth stock trading at a reasonable valuation – my kind of stock to own.

Plus, as a very nice sweetener, Absa kicks off dividends that amount to a 4.2% yield – double the S&P 500.

The shares trade in South Africa under the symbol ASA, and a few U.S. online brokerage firms now offer easy access to South African trading. Otherwise, you can also trade the shares in the Pink Sheets here in the states under the symbol AGRPY. The shares are a buy up to 170 South African rand (US$18.73). If you trade the shares in the Pink Sheets, they currently fetch $35.70 and are a buy up to US$37.45 (each Pink Sheet share represents two ordinary shares back in Johannesburg).

Until next time, stay Sovereign …

Jeff D. Opdyke

Banking on Fast-Growth Emerging Economies

The Next Krung Thai Could be … Absa Group

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