A Good Start – McLean, VA

As Silk Road Investor was launched February 15, quarterly comparisons aren’t possible. Since inception, however, and until the end of the first quarter, the Portfolio is up 12 percent, while our benchmark–the Morgan Stanley Capital International All Country World Index Total Return, which includes gross dividends–is up 3.4 percent. The S&P 500 rose by 1.4 percent, including dividends. See the chart below.

SRI returns

Turning to the markets, currency issues continue to dominate. Currencies are often discussed here (“The Butterfly Effect”) for the simple reason that they remain extremely important to investors because a lower dollar enhances investment returns from abroad.

For emerging markets, currency strength is important because it enhances their creditworthiness. As these currencies appreciate against the dollar, their external balance sheets improve as foreign debt falls in local currency terms.

Stronger currencies have allowed emerging markets, particularly in Asia, to establish their own monetary policies instead of following the Federal Reserve’s lead, as had been the case during every previous tightening cycle.

Asia as a whole has been resilient in this regard. Its currencies have appreciated against the dollar since 2002, but, more important, have done extremely well since the beginning of last year.

The dollar strengthened against the developed currencies of the world (e.g., euro and yen), and lost value against the Asian (and other emerging market) currencies in 2005.

The chart below depicts the Asian Dollar Index, a trade- and liquidity-weighted index of 10 major Asian currencies (excluding Japan). As you can see, it’s seen strong gains during the past four years. This is a fundamental change that will continue into the future (i.e., Asian currencies will strengthen and become more flexible versus the dollar), although not in a straight line.


Given Asia’s more flexible currency regimes and current account surpluses (as a whole), its economies are in a better position to withstand a shock today than before.

That said, neither Asia nor other emerging markets are immune to global economic slowdowns. Asia hasn’t developed to such a degree that it can defy adverse market conditions. Corrections, therefore, are to be expected.

The view here, though, is that because of the fundamental changes that have taken place since the 1997 meltdown Asia will recover much faster and stronger than before. In addition, it will surprise to the upside, especially versus the more developed economies’ recoveries.

It’s important for investors to remember that selloffs (as a whole) should be viewed as corrections in a strong bull market that may take time to develop but will also change the global economy and investing forever.

Portfolio Talk

As discussed here last week (“Right You Are (If You Think You Are)”), Thailand presents an opportunity. While everyone waits for the political crisis to be resolved, few are paying attention to the relative strength signals the economy is sending.

Hence, although the political situation will continue to negatively affect business and consumers for sometime, investors should take a chance and gain exposure to the Thai market.

Given the high capacity utilization levels with which the majority of companies operate, the expectation is that more investment will come sooner or later–and boost economic growth–as the cost of capital remains low, especially in real terms.

Thai capacity

Export growth remains strong thus far in 2006 at 23.3 percent, with agricultural products (up 36 percent) and manufacturing (up 22.9 percent) leading the way. Furthermore, the current account surplus was higher than expected at $700 million, a positive development because it provides good news while the political gridlock is resolved.

Expect economic development (e.g., investments) to resume once the political situation calms down. Banks, therefore, are the best way to gain exposure.

Bangkok Bank (OTC: BKKPF) is the preferred way to play the above-described scenario. Bangkok Bank is the largest commercial bank in Thailand, with corporate loans representing 57 percent of its loan portfolio. Its non-performing loans (NPL) stood at 11 percent of total loans at the end of fourth quarter 2005, with NPL coverage at 79 percent.

The bank trades at 10.8 times forward earnings and 1.3 times book and at a discount to its peers, something that should be changing soon.

US-based investors should use a limit order to buy the shares, as the stock isn’t very liquid. Although execution shouldn’t be a problem, don’t pay more than 4.50 per share for Bangkok Bank.


It will take time for Thailand’s economy to reach full speed again. It’s worth the wait, though, as the economy’s resilience will surprise to the upside. In the meantime, the Thai market offers a good yield, which makes investors’ wait more comfortable. See the chart below.

Finally, keep in mind that this is one of the riskier holdings in the Portfolio, so funds should be allocated accordingly.


Even though markets look a little nervous, a little beta will be added in the Portfolio. The stock to buy is Sweden-based Ericsson (NSDQ: ERICY). The company develops and produces advanced systems and products for wired and mobile communications in public and private networks. The product line includes digital and analog systems for telephones and networks, microwave radio links, radar surveillance systems and business systems. Through a joint venture with Sony, it also produces mobile phones.

Wireless telecom is one of the best long-term growth stories. The beauty is that this growth story is applicable to both developed and developing economies. Emerging markets, in particular, are important, as they continue to build huge wireless networks with China and India at the forefront. Ericsson is the world’s leading architect of mobile systems (the premium segment in telecommunications) and should be the big beneficiary.

An interesting opportunity the company faces is the expected growth in Africa, Eastern Europe and the Middle East–Iraq and Iran are two of the most promising markets, as a lot of big infrastructure programs are underway.

Given that these two countries have a population of 100 million people and wireless is becoming the communication method of choice in the region, wireless infrastructure orders can easily reach $8 billion as wireless subscriptions increase steadily.

Ericsson has good relationships in both places–it’s expected that up to four companies will secure cellular licenses in Iraq–and it should earn a good piece of the available business. Buy Ericsson below 40.


Finally, France’s biggest pharmaceutical company, Sanofi-Aventis (NYSE: SNY), is also added to the Portfolio. The company is defensive and helps to maintain a balanced portfolio. Its main therapeutic areas include cardiovascular/thrombosis and oncology.

The company has had issues regarding patent protection for its Plavix drug–used to treat unstable angina and mild heart attacks–which represents 10 percent of US profits. Recent news has been encouraging; the company will prevail and Plavix will be protected until 2011, a development that will prove extremely positive.

Sanofi has a solid pipeline that will dramatically enhance its value and be reflected in the stock price. Sanofi trades at a discount to its European peers, but the gap should close once the above-mentioned developments occur. Buy Sanofi below 50.


Asset Allocation & Hedges

Since the permanent hedges were introduced, many readers have asked for a clarification as to what percentage of their assets should be allocated to them.

My allocation suggestion is for about 30 percent in US Treasuries via iShares (AMEX: IEF) and 10 percent in gold bullion (or the streetTRACKS Gold Trust, NYSE: GLD, if storage is a problem). Stocks, therefore, should represent about 50 to 60 percent of the Portfolio.

A final comment on gold is warranted. Gold is an investment story about which SRI has a clear preference for the next five years. Gold is viewed here as the biggest beneficiary of the eventual problems that the global economy will face in the future, a gift of the policy excesses of the past decade.

Gold is one of our permanent hedges because it’s expected to preserve its purchasing power in deflationary and inflationary economic environments (see (“Right You Are (If You Think You Are)”).