What are the prospects for a country with no stock market (ok there is one, but there are only two stocks and foreigners cannot buy them), that lacks a real banking system and is only just emerging from isolation for the first time in 50 years? Are companies unrealistic in thinking there can be money to be made and will Myanmar’s rapid economic growth (8.5% in 2013) be snuffed out quickly as the reality of operating in such a challenging market hits home to investors?
Or is Myanmar destined to join the ranks of the South East Asian tigers like Malaysia and Thailand and so right now offers the hottest prospects to those brave enough to invest in what is a sizable (50 million people) but extremely poor market (USD 900 per capita income)?
Myanmar’s economy has been mostly closed to western investment thanks to a combination of tight government control and mismanagement of the economy, along with western sanctions on the military regime which starved it of investment, all of which added up to an extremely hostile commercial environment.
You cannot build an investor friendly market overnight, but things are changing fast, there are now over 3000 foreign companies based in Myanmar, the Chinese are the biggest players with around USD 14 billion sunk into the economy, the Thais are second with USD 10 billion, followed closely by Singapore, South Korea and Japan.
Luckily I was fortunate enough to chat to Thomas Hugger of AFC, a seasoned pro in all things investing in South East Asia – who gave me the low down on the answers to the questions above and shared his strategy on how to invest in this fast growing, risky but exciting market.
As Myanmar is lacking in stock market that is (A) liquid and (B) open to foreigners (although one is planned in 2015), the route AFC have taken is to target local companies which have exposure to Myanmar but are listed on the Hong Kong, Bangkok or Singapore exchanges. For instance Singapore listed companies with operations in Myanmar include Yoma Holdings, a property company; food group Fraser and Neave and in the energy sector Interra Resources. This gives you a stake in Myanmar’s growth without putting all your eggs in one particularly fragile South Eastern Asian Basket.
AFC have purposely avoided this but you can go down the private equity path and try to invest directly. But know that it is fraught with risk as you need excellent local knowledge and contacts to find enough companies that are worth investing in, a tough call in such an untested market.
Which Sectors are Best?
To develop their portfolio AFC first target companies which are focused on consumer goods, these are a traditionally reliable sources of growth in a frontier market like Myanmar. The next most important sector is finance: banks are vital in economies at this take off stage of development, as there is always a strong demand for capital to assist with the growth of other firms, but overall debt levels remain low compared to western markets, lessening the chances of overleveraging. Also in the words of a KPMG report “Myanmar is grossly under banked”, meaning there is a great deal of room for this sector to grow. The tourism sector (building hotels for example), is another area predicted to enjoy fast growth as people flock to a previously isolated and beautiful country.
If the sector is suitable then a thorough analysis of the company’s financials can follow, AFC run the usual checks over a potential investment, but take care to avoid over leveraged companies which are particularly vulnerable in frontier markets.
Stocks are picked and then held for a long period of time, there is no high frequency trading in these parts, commissions are high and there is a great deal of bureaucracy around registering to trade. Stocks are typically held for 2-5 years until a profit has been made or the firm is dropped from the portfolio because it is not performing adequately and deemed unlikely to recover in reasonable time.
Nuts and Bolts
The country has moved on in terms of its legal framework, the FDI law of 2012 and Foreign Investment Rules (FIR) of 2013 – protect foreign investment from nationalisation; guarantee repatriation of profit and the security of invested capital.Myanmar is also a member of MIGA – thus eligible for the agency’s investment guarantees.
Foreign investors have to receive a permit from the Myanmar Investment Commission (MIC), while these restrict the investors to certain industries, they helpfully exempt it from five years of income tax and allow it to lease land for 50 years. But despite these benefits it is advisable to take these legal requirements with a dose of reality as foreign investors are largely new to the country, and so these laws have not been road tested, therefore treat with caution.
Politically the country has moved in a democratic direction, releasing political prisoners and signing cease-fires with rebel groups, bringing a degree of stability to the country and closer to the outside world, which all bodes well for the citizens of Myanmar as well as outsiders.
In terms of resources the country has abundant minerals, gas and farmland, but as Thomas Hugger confirmed as he told me about the difficulties in trying to lease agricultural plots, any deal involving natural resources or land in a country like Myanmar has be done with extreme caution, even if you have prerequisite political connections and knowledge.
The China Factor
For many years now Myanmar’s northern neighbour has been a strong ally of the government, giving it diplomatic cover against outraged western nations at the UN, as well as trading and investing in the country as the rest of the world imposed sanctions, now have relations cooled somewhat as Myanmar has looked to other countries in ASEAN and India in order to broaden its external outlook and fears of Chinese dominance have come to the fore as it controls an uncomfortable degree of the country’s resources.
Investors have to face the fact that Myanmar could see its political and economic transformation derailed in some way, ethnic tensions could explode into widespread violence. For example places like the Rakhine State are hotbeds of religious and ethnic tensions, which have the capacity to spill into major violence, as happened in 2012. Another big worry is the country’s inadequate infrastructure, poor roads and power supplies will eventually choke growth back unless properly addressed. Like all frontier markets it faces high levels of uncertainty, but for now there is good reason for long term optimism in this corner of South East Asia