Cover Story: Good prospects in overlooked Asean

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 13, 2019 - May 19, 2019.
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Over the past few years, there has been a lot of talk about the appeal of emerging markets (EM) among investors and market observers. However, the markets usually referred to were in China and India while Asean — collectively the sixth largest economy in the world with a combined GDP of US$2.6 trillion and a population of more than 500 million — has been largely overlooked, according to fund managers.

“With favourable demographics, a growing middle class, rising incomes as well as infrastructure development underpinning Asean’s economic growth, the region is projected to become the world’s fourth largest economy by 2030,” says Soh Chih Kai, Lion Global Investors Asian equities portfolio manager.

Asean consists of Malaysia, Indonesia, Singapore, the Philippines, Thailand, Brunei, Laos, Cambodia, Vietnam and Myanmar.

These countries have become attractive as they have strengthened both their corporate and government balance sheets since the two major financial crises in the last 20 years — the 1997/98 Asian financial crisis and the 2008 global financial crisis, says RHB Asset Management Sdn Bhd managing director and regional head Eliza Ong.

Soh concurs. He points out the fiscal positions of these companies have strengthened with government debt levels lower than 50% of GDP and a high savings rate of at least one-third of GDP. “The growth rate of Asean countries has also become less volatile since 2000. These should provide a buffer to cushion future external shocks.”

Given all this, it may come as a surprise that Asean countries have been overlooked but UOB Asset Management Bhd CEO Lim Suet Ling says this is because Asean is just a small constituent of the much talked about investment category of emerging markets.

“EM also includes North Asia; China and Korea represents almost half (46%) of the MSCI Emerging Market Index while Asean, excluding Singapore, is only 8%. That’s why when people talk about emerging markets, the first market they go to is China.

“When a fund manager looks at a market, they look at market capitalisation. Who is the biggest contributor to Malaysia’s economy? Petroliam Nasional Bhd, but it is not listed. So the FBM KLCI does not look big. As an economy, however, Malaysia is bigger than what is represented. Asean is small but there is growth, so investors should look at it in terms of individual stocks and opportunities,” says Lim.

As of March 29, the MSCI AC Asean Index has provided 11.98% in annualised 10-year returns, compared with the MSCI Emerging Markets Index’s returns of 9.31% over the same period.

Asean is the market to invest in for those looking for consistent, stable returns over the long term given its lower beta compared to most North Asian countries, says Patrick Chang, chief investment officer at Principal Asset Management Bhd.

“A lot of investors think that Asean markets are risky. But China’s stock index fell 30% last year. Isn’t that considered risky? Asean markets did not fall as much — in fact, most Asean countries, including Indonesia, Vietnam and the Philippines were actually showing positive returns last year,” Chang points out.

That being said, he admits that the Asean market is lacking depth when compared to the North Asian markets. However, Asean is going through a normalised, healthy growth and its companies are giving out higher dividends yields compared to the companies in North Asia, he adds.


Asean’s diversity an added advantage

Asean is well-positioned for global trade, being the world’s fourth largest exporting region collectively accounting for around 7% of global exports.

According to Lion Global’s Soh, Asean’s member states have developed more sophisticated manufacturing capabilities that enhance their trading positions globally, with Vietnam specialising in textiles and apparel, Singapore and Malaysia in electronics and chemicals and Thailand in automobiles and automotive parts among others.

“Other examples include Indonesia — the world’s largest producer and exporter of palm oil, largest exporter of coal and the second largest producer of cocoa and tin; Myanmar, which has large reserves of oil, gas and precious minerals; as well as the Philippines which has established a thriving business process outsourcing industry,” he adds.

Each Asean country is unique with different strengths and challenges — it is a region of varying economic development, resources and infrastructure. Instead of seeing this as an obstacle, investors should view it as an opportunity, says Chang.

“Asean can be divided into three economic stages — mature economies like Malaysia and Singapore, emerging economies like Indonesia, Thailand and the Philippines and lastly, high-growth economies such as Vietnam and Myanmar. By investing in Asean, investors are able to benefit from all these different economic cycles, which are progressing in a nice trajectory,” says Chang.

He adds that while it is natural for investors to only focus on the two mature economies within Asean, the other countries do present interesting opportunities that may provide investors with very good returns.

“The largest, deepest market in Asean today is actually Thailand. This country, regarded as the ‘sick man of Asia’ 20 years ago, is no longer sick. It now has a hefty current account surplus and one of the strongest inflows in the Asean bond market. Not many people have noticed this,” says Chang.

He thinks that Indonesia also looks interesting at the moment, adding that he believes the country will strive to sustain its GDP growth of between 5% and 6% moving forward, driven by labour reforms and infrastructure development initiatives, among others. “Indonesia has embarked on its first mass rapid transit system project and there are more high-rise residential properties, hospitals and ports that are being built.

“Beyond the traditional brick and mortar industries, the country also has a very interesting internet sector, driven by e-commerce sites like Tokopedia and Bukalapak,” he adds.

Chang is also in favour of Vietnam. In fact, he has been monitoring it closely for the past seven years. Being a pure frontier market, he finds feels the country’s key growth driver would be its favourable demographics. Vietnam’s population is triple that of Malaysia at 95 million, 65% of whom are below the age of 30, presenting investors with strong demographic dividends.

Not only does this translate to a higher consumption of fast-moving consumer goods, it also leads to a flourishing internet sector, says Chang. He adds that internet penetration in Vietnam is one of the highest in Asean — its citizens are now using their mobile phones for various tasks and transactions.

“It’s also a very hardworking population, surpassing many developed countries in terms of Program for International Student Assessment (PISA) score,” he says. PISA is a worldwide study by the Organisation for Economic Cooperation and Development to evaluate educational systems by measuring 15-year-old students’ scholastic performance on mathematics, science and reading.

“This means that it has a very attractive and cheap workforce. A lot of multinational corporations (MNCs) are taking advantage of this by moving there. For example, 70% of Samsung’s mobile phones are produced out of Vietnam,” says Chang.

This is a trend throughout Asean. According to Ong, Asean’s role as a manufacturing hub is growing in prominence as its wages have become more competitive than China’s. In light of the trade tensions between the US and China, MNCs are now relocating their production out of China to these lower-cost countries, which have adequate production facilities and a good network of free-trade agreements in place.

While it has been going on for a few years now, the US-China trade war had prompted a sharp acceleration of this trend as companies attempt to avoid US import tariffs on Chinese goods, according to various reports.

So what are the more interesting sectors in Asean? So far, the majority of fund allocations have been in the banking and telecommunications sectors. RHB Asset Management’s Ong explains that this is because the countries in Asean are still developing — meaning that businesses located here would still need financing and infrastructure.

“These sectors are likely to be linked to government or large conglomerates owned by founding patriarchs or matriarchs. As the economy progresses, the rise of industrials can be seen. Then the economy would take off from industrialisation to further progress into innovation [such as information technology and healthcare] along with the growth in wealth, which will then boost consumption,” says Ong.

Besides the banking and telecommunications sectors, Lion Global Investors’ Soh says he also likes the consumer and infrastructure sectors that provide exposure to Asean’s young population, rising middle class with increasing purchasing power and infrastructure spending.

A quick look at some Asean-focused unit trust funds in Malaysia reveals that most of these have the financial sector as their highest allocation. For instance, the RHB Asean fund has an allocation of 46.48% to this sector, according to its April fund fact sheet. The top holdings of most of these Asean-focused funds include DBS Group Holdings Ltd, Oversea-Chinese Banking Corp and United Overseas Bank Ltd.


Challenges and long-term drivers

While there are a lot of advantages to having an Asean exposure, there are also a couple of risks. For instance, Asean is more susceptible to capital flows and currency impact as most of the countries in the region still require external financing and investments to fund their development, says Soh.

“Varying levels of economic development among the 10 member states — from a developed economy like Singapore to a frontier economy like Myanmar — and the diversity in culture, language and religion make it difficult to create a one-size-fits-all investment strategy.”

Aside from that, the region also has high external trade dependence and strong trade reliance on China, says Ong. “Asean’s total merchandise trade to GDP grew to 87% in 2016 from 43.1% in 1967. Additionally, China accounted for 20.3% of total Asean imports of goods and 14.1% of total exports of goods in 2017,” she adds.

UOB Asset Management’s Lim says the market of some Asean member states lack liquidity, especially Cambodia, Laos, Myanmar and Vietnam. As retail investors are used to daily liquidity, they may find it difficult to navigate these smaller markets. Therefore, she suggests either buying into an Asean fund or investing in Asean companies that are listed elsewhere.

“NagaCorp Ltd, for example, is a Cambodian leisure and gaming operator listed on the Hong Kong Stock Exchange. So, even though you are investing in the Hong Kong market you are actually getting exposure in Cambodia. Other examples are Thailand-based Thai Beverage plc and Myanmar-based Yoma Strategic Holdings Ltd, both listed on the Singapore Exchange,” says Lim.

Another challenge the region is facing is that most of its companies have yet to reach maturity, she adds. Corporate governance remains a key issue and it is difficult for investors to sieve through the companies, given the limited amount of information available.

“Investors in the region are also not mature enough. Most of them are retail, so there is always [motivation of] greed and fear which causes volatility. Institutional investors will need to come in to help the markets reach maturity. Hopefully, when these funds come in, they will provide stability for the good stocks, helping the market become steadier,” says Lim.

Structural themes such as a growing middle-income group and rising consumption should remain key growth drivers over the next 12 to 24 months, says Soh. Elections in most Asean countries are over, so Lion Global Investors will focus on infrastructure investment and development in the region as governments look to strengthen their economies.

Chang is excited about a lot of the growth initiatives undertaken by several Asean governments to attract long-term capital investments, such as Thailand’s Eastern Economic Corridor (EEC), which straddles three eastern provinces — Chonburi, Rayong and Chachoengsao.

The 13,000 sq km EEC is part of the government’s wider Thailand 4.0 plan to transform its economy into Southeast Asia’s engine of growth. It is poised to attract about US$46 billion in investments, focused on “S-curve” industries — next-generation automotive, aviation and logistics, smart electronics, medical tourism, food, robotics, agriculture and biotechnology.

Another long-term growth driver is China’s Belt and Road Initiative (BRI). This is important for Asean countries as it can help to fund and meet their infrastructure requirements, says Ong. It also supports the success of the Asean Community Vision 2025 and The Master Plan on Asean Connectivity 2025 initiatives, she adds.

“Based on an estimation, the BRI has resulted in US$460 billion worth of investments in the five years since its inception in 2013. However, it is notable that the BRI continues to see serious pushback and disapproval because of its lack of transparency, inclusivity and potential ‘debt traps’ such as the often cited case of Sri Lanka’s Hambantota Port,” says Ong.

Although the BRI progress has stalled, Ong says the market is hopeful that the initiative will enter a new stage following its summit held last month. “Nonetheless, we should note that the broader motives and longer-term structural changes that the BRI will bring to Asean could be positive. This warrants careful attention in the months and years ahead for further potential developments within the BRI.”



Anticipating Asean start-up IPOs

Asean is home to some of Asia’s biggest technology start-ups. The scene, which was considered small and fragmented some five years ago has turned into a thriving ecosystem, attracting hundreds of millions of dollars in funding annually. For example, ride hailing platform Grab has raised more than US$7.5 billion in its series H round of funding as at March 6.

Soh Chih Kai, Lion Global Investors Asian equities portfolio manager, says that it is not surprising to see the technology start-up industry blossoming with lots of funds flowing into the region given the current low penetration and adoption of technology in Asean, on top of the immense potential opportunities. This will in turn continue to drive the growth of the industry and technology start-ups, he adds.

Patrick Chang, CIO at Principal Asset Management Bhd, concurs. He says that over the past few years, there have been a lot of market observers who were unfairly comparing Asean countries to North Asian countries, highlighting that Asean does not have its own version of “Alibaba” or “Tencent”.

“The fact is that we do have a lot of these companies; they are just not listed yet. That’s why I am hopeful that Go-Jek, Tokopedia, Bukalapak and the other big start-ups will soon be listed. It would definitely bring the shine back into Asean and propel people’s mindset to think that Asean is no longer a region of old economies,” says Chang.

While she thinks that this would be a good opportunity for retail investors in the region to finally participate in the high-growth unicorn start-up scene, Lim Suet Ling, UOB Asset Management Bhd CEO, says that investors need to be mindful of valuations as new technology stocks tend to be more expensive due to growth potential.

“It may even be chased out of proportion, so investors have to be rational and wait for the numbers to be brought back down to earth again. Additionally, investors will also have to keep themselves up to date because technology moves very fast. If the investors know where the technology is moving, they won’t be stuck in the investment,” says Lim.

That being said, retail investors can still invest in start-ups even before they are listed on the stock exchange, Eliza Ong, RHB Asset Management Sdn Bhd managing director and regional head, points out. They can do so via crowdfunding platforms, which are regulated in some Asean countries such as Malaysia and Singapore. Other countries like Thailand and Indonesia are setting up their own frameworks for such platforms.

“This, however, comes with a certain level of risk which should be properly disclosed to non-sophisticated investors to assist them in making informed decisions,” says Ong.



More green bond issuances expected

In 2017, the Asean Capital Markets Forum (ACMF) introduced the Asean Green Bond Standards. Subsequently, in 2018, the organisation came out with two more standards, the Asean Social Bond Standards and Sustainability Bond Standards. According to ACMF’s website, as at March 11, there were nine issuances aligned with the three standards.

Going forward, there will be a continued demand for these issuances, says RHB Asset Management Sdn Bhd managing director and regional head Eliza Ong. “To ensure that Asean green investment opportunities are met by 2030, it is estimated that Asean will need US$200 billion in green investment annually from 2016 to 2030, a 400% increase from today’s annual supply of green finance.”

Patrick Chang, chief investment officer at Principal Asset Management Bhd, agrees. He thinks the appetite for such issuances will increase due to the huge movement towards environmental, social and governance (ESG) awareness among institutional and retail investors globally.

“It is a typical demand and supply situation — as the demand increases, there will be more companies interested in becoming issuers. That was how we started our bond market in the 1970s when the government decided to issue more bonds and get pension funds and investors like ourselves to subscribe to them, leading to a thriving bond market. Today, Malaysia is one of the largest bond markets in Southeast Asia.

“So, I think it has to start somewhere. Malaysia is one of the pioneers of the ESG Index in the region and I think eventually the pension funds will adopt it. Then we, as a pension fund portfolio manager, will have to adopt it as well,” says Chang.

As at end-November 2018, the Asean green bond market recorded a total issuance of US$5 billion with Indonesia, Singapore and Malaysia as the top three countries for labelled green bond issuances, says Ong.

“Indonesia is the largest regional green bond issuer with its US$1.25 billion sovereign green sukuk. Buildings is the largest category financed by green bonds (43% of the market by volume), followed by energy at 32%. Transport is the largest sector financed by unlabelled climate-aligned issuances with US$7.4 billion outstanding, in front of energy at US$1.3 billion outstanding,” she elaborates.