Tuesday 19 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 20 - June 26, 2016.

 

Against a backdrop of negative yields globally, the region still has plenty of potential for investors. Patrick Chang, chief investment officer at CIMB-Principal Asset Management Bhd, says the region’s economic growth, as a result of growing affluence and infrastructure spending, coupled with healthy dividend yields, makes it an attractive investment destination.

 

Asean economies will continue to outperform as they are healthier than those in North Asia such as China. They also offer some of the highest dividend yields in the world, says Patrick Chang, chief investment officer at CIMB-Principal Asset Management Bhd. 

“Asean economies are outperforming not only because of their higher dividend yields but also because they are relatively healthier than the North Asian economies. Although their currencies were bashed down last year when the US dollar strengthened, they are getting stronger now. The emerging markets in Asean such as Thailand, Indonesia and the Philippines will provide higher growth and higher earning companies, so this is a good opportunity to invest in the region,” he tells Personal Wealth on the sidelines of the CIMB Preferred’s 100th Financial Advisory Series recently.

According to Bloomberg data as at June 15, the MSCI Southeast Asia had a dividend yield of 3.11% for the one-year period — more than the MSCI Emerging Markets, MSCI AC Asia ex Japan and MSCI World, which had yields of 2.85%, 2.85% and 2.75% respectively.

Chang is an Asean markets specialist with 22 years’ experience. He is bullish on the region as he sees value emerging in these markets. “If we look at the return on equity (ROE) versus price-to-book value in Asean over the last 15 years, we can see that the big jump since 2009 had been generated by a few factors, including the huge commodity boom from 2009 to 2011. In May 2013, the ROE began to drop and it is now at 2009 levels,” he says.

 “We live in a world where Japan and Europe have negative yields, so investors in these countries can no longer keep their money in the bank. They need more returns. The yields in Asean are much higher in the eyes of the Europeans and Japanese, so they will invest in these countries,” says Chang. 

That is the reason CIMB-Principal has added higher-yield companies to its Malaysian and Asean portfolios, he says. Investors can look at real estate investment trusts, utilities and infrastructure-related companies to get higher dividend yields.

A Bloomberg article dated May 31 says Japan’s investments in Asean last year exceeded those in China and Hong Kong for the third year running. Meanwhile, according to Bank of Japan data, its Asean investments had tripled to ¥20.1 trillion from five years ago.

The higher inflows were attributed to push and pull factors such as Asean’s low labour costs, low per capita income and relatively young population. Also, tensions reduced China’s appeal in the eyes of some Japanese businesses, causing them to explore other markets. The European Union is one of Asean’s largest sources of foreign direct investment (FDI). 

 

Aspirational buying to boost industries

Asean is poised to become an economic powerhouse, making it an attractive region for investors. According to a McKinsey & Co 2014 report, it would be the seventh largest economy in the world if it were a single country, based on its GDP of US$2.4 trillion in 2013. Asean is expected to be the fourth largest economy by 2050, says the report. 

Chang likes the long-term consumption trend in Asean. He believes that GDP per capita will continue to rise and wages will increase in middle-income countries. These bode well for some companies, especially for automotive, cosmetic and luxury brands. 

“Aspirational buying across Asean is huge. Going forward, this is what middle-class consumption will be like. The beauty of this is that with smartphones, people can spend online easily. It has nothing to do with GDP, interest rates and all the noise you hear in the market. I think this is a very structural story,” says Chang. 

He cites an example of a rising affluent population where people plan to increase their aspirational buying over time. For example, he says, these people would buy Toblerone chocolate once in a while instead of buying their usual low-quality milk chocolate all the time.

“If you are poor, your aspirational buying will increase. And this is the biggest phenomenon in terms of consumption among the middle class across Asean. About 20 years ago, people used Nokia. But today, in emerging markets such as the Philippines, everyone wants an [Apple] iPhone. They are not earning a lot, but they will save just to buy an iPhone.”

It is the same when it comes to owning a vehicle, he says. When people buy pick-up trucks in the Philippines, their ultimate goal is the Toyota Hilux. That is why Toyota has 40% market share in the country. But eventually, this market share will erode as the country brings in other high-end brands such as Lexus and BMW. 

For example, Philippine-based Universal Robina Corp (URC) — which produces consumer goods such as flour, sugar, beverages, snacks, biscuits and candy — bought into New Zealand’s largest snack food producer Griffin’s Foods for US$608 million in mid-2014 to gain access to premium brands. 

According to the Nikkei Asian Review, URC also formed a joint venture with Japan-based Calbee Inc in 2014 to launch the latter’s potato snacks in the Philippines. As at June 14, URC shares were trading at 194.10 peso on the Philippine Stock Exchange. 

 

High-growth markets

Chang says Asean today can be grouped into developing countries, such as Singapore and Thailand, and emerging countries such as Laos, Vietnam and Myanmar. CIMB-Principal Asset Management has structured its Asean portfolio to include overweight high-growth markets such as the Philippines, Indonesia and Thailand. 

“The political risks in the Philippines have subsided, and it has become one of the most underleveraged economies in the region. The country has the largest business process outsourcing (BPO) business in the world. JP Morgan and Wells Fargo have set up BPO centres in Manila and Cebu. The services provided include call centres to accounting and webpage creation. Foreign direct investment will continue to come in as long as the labour cost is relatively cheap compared with China’s,” he says.

Chang likes Indonesia and is hopeful that its tax amnesty bill will pass. The bill — designed to make it attractive for tax evaders to come clean, declare and repatriate their funds — will be the biggest driver of consumption and the infrastructure boom as the government’s coffers grow. 

“We like Thailand because it is the epicentre of Indochina and will be the major supply chain for the whole region. So, this gives us exposure to the supply chain for many sectors,” says Chang, adding in jest that the country is also his favourite holiday destination. 

According to Bloomberg data as at June 14, while the Philippine Stock Exchange’s PSEi Index was offering a year-to-date return of 6.88% and the Jakarta Composite Index had delivered a year-to-date return of 4.79%, the Thailand SET 50 Index had provided a year-to-date return of 11.44%. 

In the first four months of this year, Asean outperformed the rest of Asia and the developed markets, says Chang. He points out that normally emerging markets do well when the US dollar is weak. 

“The outperformance of the Asean market was caused by a few things. First, the US dollar found a little of its bottom; it is coming off a very high base.” 

The prices of commodities such as oil have also rebounded, which is good news for Asean as many of them, such as Indonesia, Malaysia and Thailand, are commodity exporters. Chang thinks the markets are in the process of adjustment and need recalibration in terms of things like interest rate expectation. 

“Overall, Asia is in a very low growth environment. The slowing down of China — the biggest market in Asia — impacts Asean, especially when most of us are suffering from the commodity boom-bust cycle, although prices have started to stabilise,” he says.

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