FINDING investment opportunities is becoming an increasingly challenging task amid a toppish US equities market and slowing global growth. Yet, there are opportunities in some pockets of the world.

Lee Kai Yang, chief investment officer at RHB OSK Asset Management Pte Ltd in Singapore, suggests that investors could look at Asean markets, which he believes offer better growth potential and valuations than the rest of the world.

“If you look at the overall market, the developed markets aren’t offering that much [in terms of growth]. The US economy is looking to grow at about 3% this year, and Europe and Japan are growing at about 1%. China has slowed from 10% to 11% in the past to about 7% currently, and this will likely be the trend in the coming years,” he says.

“[But] the Asean region consistently grew at an average of 5% from 2011 to 2013 ... that is strong and consistent growth. In fact, the Philippines — a key market — posted growth of 3.6% in 2011, 6.8% in 2012 and 7.2% in 2013.”

Asean, he adds, has been overshadowed by China’s rapid expansion in recent years. “If China had continued to grow at its previous pace of 10% to 11%, investors would likely have continued to invest there.

Now that China and India are slowing, investors are beginning to realise Asean’s potential.”

Lee thinks China’s slowdown will benefit Asean in the long run because of the structural changes that are being undertaken. “China is undergoing an economic growth model restructuring. It is transitioning from a fixed-asset investment export-oriented economy to one that is more consumer-based,” he points out.

“The current slowdown is part of this transition. In the long term, the transition will benefit the Southeast Asian markets because China will consume much of the goods produced by this region. In fact, trading volume between the two markets has increased substantially in recent years.”

China is Asean’s largest trading partner, with bilateral trade increasing at an annual growth rate of 21.6% from 2009 onwards, latest data from the Asean Secretariat website show. As at 2013, trade between China and Asean amounted to US$350.2 billion, up 9.6% from US$319.5 billion in 2012.

Lee is bullish on Asean equities, saying they are an opportunity for investors to participate in the region’s growth story. Some of the markets he favours are the Philippines and Indonesia. The two countries share a common theme — a young and growing working population, a huge consumer market and low debt levels.

“Asean’s middle-class income is the fastest growing in the region. The Philippines and Indonesia have a favourable ‘demographic tailwind’. Every year, more and more people are coming out to work [there], and once they start earning, their consumption will contribute to the countries’ gross domestic product (GDP),” he says.

The low debt levels are another factor. According to McKinsey Global Institute’s report “Debt and (Not Much) Deleveraging” dated February 2015, most of the world economies have taken on debt in both absolute terms and relative to GDP folowing the 2008 global financial crisis. Since 2007, global debt has grown US$57 trillion (RM203.2 trillion), while global debt-to-GDP ratio stood at 286% as at December 2014.

In contrast, the Philippines had a low debt-to-GDP ratio of 48.8% in 2013, meaning the country can take on more debt to finance spending if it wants to. The same applies to Indonesia, which had a debt-to-GDP ratio of 24% during the same period.

“We favour the consumer-based segment in both countries. This includes the automotive, consumer discretionary and property sectors,” Lee says, adding that the auto penetration rate in the Philippines is low.

Both Indonesia and the Philippines are looking at infrastructure spending to boost economic growth. Indonesia has freed up budget funds by cutting its fuel subsidies and the government, under its new president Joko Widodo, has pledged to spend IDR281.1 trillion on infrastructure. According to a Pricewaterhouse Coopers report dated June 2014, the Philippines is expected to spend up to US$27 billion on infrastructure by 2025.

“We expect the building materials and construction sectors in both countries to do well. The Philippines’ property sector is expected to benefit from this,” says Lee.

Their stock markets, he adds, have cheaper valuations than the US markets. “The Philippine Stock Exchange Index and the Jakarta Composite Index are trading at an 8% premium to their historical average valuation, compared with the S&P 500’s 21% premium.” 

He is underweight on Thailand and Malaysia, and neutral on Singapore. “Thailand has an ageing population. They lack the demographic tailwind the Philippines and Indonesia have. However, it has the advantage of being close to Laos, Vietnam, Myanmar and Cambodia.”

As for Singapore, he believes that while it is projected to grow 3% this year, that number is still low compared to the growth numbers of the Philippines, Indonesia and even Malaysia.

Even so, Lee believes that some sectors, such as the Singaporean real estate investment trusts (REITs), can be attractive. “Current interest rates are low, and if the US Federal Reserve raises interest rates, it will most likely be not that significant. Most REITs have already locked in their financing for the next three years and most of them are 100% leased out, while their gearing is secured,” he explains. 

“If they continue to give you 5% to 6% dividend yield, that is pretty attractive in the current [low] interest rate environment.”

In the past, Asean had been vulnerable to fund flows. However, Lee believes that these countries have been on a stronger footing since the Asian financial crisis.

“About 10 to 15 years ago, foreigners made up 70% of the fund flows in the market, while domestic funds made up only 30%. Today, the situation is the other way round,” he says.

“Domestic wealth has risen significantly. Asean markets are no longer as reliant on foreign flows.”

Foreign fund flows create volatility during “risk-off” periods, where investors typically sell down riskier assets such as equities in favour of bonds or safe haven assets like the US dollar or the yen. But Lee believes this will only be short term, as domestic funds will move in to support the markets.

“During periods of risk-off globally, you will see a short-term panic in the market. This will happen for maybe two weeks to a month, where the market will come down sharply. But domestic funds have been getting subscriptions and they have built up their cash,” he says.

“When a risk-off period happens, the correction [back upwards] can be sharp because domestic funds are going in. No doubt it will be very volatile, but it will be a short period and it will come back up strongly.”

The Asean region is set to be more integrated than ever as the Asean Economic Community (AEC) comes into place by end-2015, says Lee. 

“We believe that all the countries in Asean will benefit from the AEC. It will help the world to focus on Asean as a single region — a single market of 600 million people. It will create more foreign direct investment (FDI), trade and tourism within the region, making Asean even more integrated and more dynamic,” he adds. 

“The AEC will benefit the countries and sectors differently. For example, the more developed markets, such as Singapore, may benefit from being the financial centre for financing trades and FDI.

“Meanwhile, the manufacturing sector in lower cost countries may benefit from being able to sell to a bigger market. The tourism sector in all these countries could benefit as people start visiting their neighbouring countries,” says Lee. 

Sectors that will be negatively affected, he adds, will be mainly those that were previously protected but will now face more competition from their regional peers.

Lee suggests that investors allocate a certain amount for Southeast Asian markets as a starting point. “If there is some global event and a risk-off happens, you can put in perhaps 30% of your intended capital,” he says. Investors can spread out the rest of their capital in Asean markets and buy in when there are subsequent corrections in the market.

As for Malaysia, Lee thinks its reliance on commodity-related revenue, high household debt and the upcoming Goods and Services Tax make the country less favourable than other Asean countries.

“We are ‘underweight’ on Malaysia. If the oil price goes back up, then we may upgrade the country from ‘neutral-underweight’ to ‘neutral’, or maybe slightly ‘overweight’,” he says. “But structurally, Indonesia and the Philippines remain our top picks.”

This article first appeared in Personal Wealth, a section of The Edge Malaysia, on February 23 - March 1, 2015.

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