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Eastern promise

28 April 2015

The continued economic rise of the 10 members of the Association of Southeast Asian Nations.

In 1967, Indonesia, Malaysia, the Philippines, Singapore and Thailand formed the Association of Southeast Asian Nations, with a view to promoting economic growth, social progress and regional stability. Nearly 50 years later the group has grown to include Brunei, Vietnam, Laos, Myanmar (Burma) and Cambodia. Known as ASEAN, it now has a collective population of more than 600 million people and a combined GDP of almost $2.5 trillion1. If the region were a single entity, it would rank as the seventh-largest economy in the world, behind China, the US, Japan, Germany, France and the UK2. But it is far from a single entity. Culturally, geographically and economically, there are huge variations.

Singapore is an advanced nation, with infrastructure to rival any in the developed world. Indonesia’s GDP is greater than that of Thailand and Malaysia combined, and it’s almost 80 times larger than Laos3.

‘We are looking at a huge part of the world, where each country has its own particular economic advantages and disadvantages,’ says Hugh Young, managing director of Aberdeen Asset Management in Asia and investment manager for the St. James’s Place Far East fund.

From 2000 to 2010, most of the area was overlooked by investors, who were busy chasing growth in neighbouring China, India and Australia. In recent times, however, the situation has changed. ‘ASEAN is the United States’ third largest Asian trading partner and the largest Asian destination for direct investment. At current growth rates, ASEAN should become the fourth-largest market after the EU, US and China by 2030, supported by an increasingly well-educated workforce, abundant natural resources and a favourable geographic location,’ says US investment bank J.P. Morgan4. Against this backdrop, stock markets in the region were among the best performers in 2014, as ASEAN economies delivered strong GDP growth, driven increasingly by domestic demand.

‘In 2014, investors derived comfort from ASEAN being more domestically focused and less export-dependent than North Asia. ASEAN member countries are also far enough away from China to be spared scepticism among some investors about the mainland’s ability to engineer an economic rebalancing without the wheels coming off,’ says Markus Rosgen, head of Asia-Pacific equity strategy at US banking group Citi.

Interest in ASEAN was particularly noteworthy as the region’s economy has traditionally been associated with commodities, which fell almost across the board in 2014. In times gone by, this would have brought ASEAN to its knees. These days, however, the region is diversifying into other sectors and benefiting from a steady increase in consumer demand. ‘A growing middle class is driving demand for a whole range of products and services, such as white goods, automobiles and banking,’ says Fabian Wong, a partner at consultancy EY. Nonetheless, as even the most fervent ASEAN supporters would acknowledge, the region has its challenges, not least because it is made up of a number of different economies.

Although Singapore is only a tiny island with a population of just over five million and no natural resources of its own, the country has become a regional hub, trusted and respected across the Western world. ‘Singapore has built an exceptionally efficient apparatus of institutions that work on world-class lines in areas such as health, education, law and regulation. As such, it has become highly attractive as a regional HQ for a range of value-added industries, such as financial services, biotech and petrochemicals. It’s a phenomenal success story,’ says Young. Despite, or perhaps because of, its success economic growth has been less stellar here than in other, less developed parts of ASEAN. GDP growth in Vietnam and

Cambodia, for example, hovered around 7% last year; while in Singapore, it was a more pedestrian 2.9%5.

It is easy to be seduced by heady growth figures but regional experts suggest that close scrutiny is required on both a macro and micro-economic level. There are clear signs of progress, but political unrest remains a concern in several countries and corruption is rife.

‘You need to look at the level of corruption before investing in ASEAN. Check whether the government is cleaning up its act, see whether power is being handed down from one generation to another, assess the legal framework and find out if countries are genuinely open for business,’ says Wong. Thailand is an intriguing example. ‘Thailand is very well placed to benefit from the growth elsewhere in the region, but its well-publicised political problems have been not so much swept as stamped under the carpet by the military regime. Divisions clearly remain and there is lots of potential for things to go wrong,’ explains Young.

Against that, however, Young suggests that the business climate remains fairly robust, as the new regime is keen to encourage growth. ‘Even though there are rival political factions, there is no philosophical disagreement about how to run the economy and many businesses go on much the same as usual. People like Thailand and tend to give it the benefit of the doubt. Foreign investment is welcomed and there is a growing manufacturing sector,’ he says. Countries such as Indonesia and the Philippines were once infamous for their corrupt regimes but moves are afoot to drive change. In Indonesia, President Joko Widodo rode into power late last year on a pro-business, anti-corruption agenda.

‘It’s a country of more than 200 million people, with tremendous potential for development. The new president is a keen reformer, but the opposition has quite a lot of power still and there are still many vested interests to battle against. It is not necessarily going to be a smooth transition, but the country is maturing and people are generally becoming richer,’ says Young. In the Philippines, President Benigno Aquino III has also pledged to clean up the country and there has been encouraging progress since he came to power in 2010. In recent times there have been clashes with Muslim extremists, but most commentators remain positive about the economic outlook. ‘I believe it will be the best-performing economy in the region this year,’ says Gareth Leather, Asia economist at Capital Economics.

Stock market performance from the Philippines, Indonesia and Thailand has been impressive. Each delivered gains of more than 20% in 2014 and they have made further headway this year6. The tiny Vietnam stock market has delivered double-digit gains, while Malaysia, hit by the falling oil price, has moved into positive territory this year. Some of the smaller ASEAN markets, such as Laos or Cambodia, can be hard for investors to access. Many prefer to invest in Singapore instead.

The FTSE Straits Times index in Singapore rose 6% in 2014, and has made further gains this year7. ‘The Singapore market is still relatively cheap. Many of the companies have a footprint in places like Vietnam or Indonesia, and have higher standards in areas such as corporate governance. So it can be a safer way of accessing some of the racier countries in the region,’ says Young.

Clearly, the 10 countries that make up ASEAN are diverse on many levels. But there are certain characteristics that most share, such as young populations, growing wealth and a consequent increase in demand for consumer goods, financial products and mobile technology. There is also a growing desire for closer unity. The region has made a commitment to forge closer ties; to allow free trade and free movement of goods, services and people by the end of 2015. While there is considerable scepticism about whether this goal can be achieved, the target itself is seen as encouraging. Across ASEAN, most observers are confident that progress is being made and that long-term prospects are promising. However, ‘caution’ remains an essential watchword for investors. ‘It is easy to get carried away, but you have to use common sense and make sure you do proper due diligence,’ says Young. ‘Companies are being run better, but bureaucracy is often corrupt – and poor infrastructure means that even if wages are cheap, overall operating costs may not be. There are some great businesses out there and some excellent investment opportunities; but you have to do your homework, you have to understand the region and, ideally, you have to have contacts on the ground.’

The information contained above, does not constitute investment advice. It is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Full advice should be taken to evaluate risks, consequences and suitability of any prospective fund or investment. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place.

1, 3, 5 Trading Economics
2 ASEAN Community in Figures
4 ASEAN’s Bright Future: Growth Opportunities for Corporates in the ASEAN Region
6 Investopedia
7 wsj.com

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