This article first appeared in Personal Wealth, The Edge Malaysia Weekly on December 9, 2019 - December 15, 2019

The Asean market today boasts favourable demographics, a thriving tourism industry, less market volatility and the ability to benefit from trade tensions. However, many investors are still oblivious to such advantages due to the reputation the region garnered after the 2008 global financial crisis, says JP Morgan Asset Management.

Alexander Treves, managing director and head of investment specialists for Asia, emerging markets and Asia-Pacific equities at JP Morgan Asset Management, says Asean is a big, growing and diverse market with a lot of attractive qualities. Unfortunately, these have largely been forgotten by investors.

After the global financial crisis, Asean went through a “binge eating” phase of double-digit credit growth, unhedged US dollar borrowing, steep hikes in minimum wages and a lack of infrastructure investment. But a detox period did take place — bad bank loans were recognised, there were tax and oil subsidy reforms and more investment into infrastructure. As a result, investors could see that the region was on a stable footing.

“While Asean was going through a period of resetting, the attention turned to North Asia. There are many reasons why that happened, including the emergence of A-shares as an investable asset, the Chinese economic miracle and the rise of really impressive local franchises — often in technology companies such as Samsung Electronics or Taiwan Semiconductor Manufacturing Co Ltd,” says Treves.

Compared with many markets around the world, Asean is attractive because it is less volatile. “If we look at the volatility of the various MSCI Country Indices over the last 10 years, we can see that emerging markets as a whole and even Europe have been a lot more volatile than Asean. That is not to say it is without risk. But it is less volatile than many people would intuitively think,” he says.

Asean also has an advantage in terms of size and population. As a whole, the region is the third largest population bloc in the world after China and India. “The opportunity lies in the impact of the sizeable population. As an economic bloc, Asean is the world’s sixth largest economy — up from No 12 about a decade ago. Depending on which forecast you use, it could be the fourth largest in the next decade,” says Treves.

It is also a diverse market, with countries of various economic capacities. Singapore is a small but developed First World country. Thailand is a bigger, less developed country growing at a steady pace. Indonesia is a huge market that sees rapid year on year (y-o-y) growth. The region also includes less developed countries such as Vietnam and Myanmar, which come with their own set of advantages.

Treves thinks investors have not realised the opportunities presented by the Asean market. “We have yet to see big positive inflows into these markets, which one would expect if investors had fully recognised these opportunities. What we can see is that the cumulative equity flows into Asean were somewhat positive in 2016, 2017 and year to date. But they were negative in 2015 and 2018,” he says.

Market catalysts

One of the catalysts that may bring investors back to the market is the tourism boom — Asean is the fastest-growing region in the world for tourism, capturing 9% of all international tourists. As at April last year, five-year compound annual growth rate of tourist arrivals stood at 7.9%, compared with Europe’s 2.8%, the Americas’ 3.7% and the Middle East’s 4.3%.

“Some of the most visited cities in the world are in Asean — Bangkok, Singapore and Kuala Lumpur. Asean has received an outsized contribution from tourism to its economy compared with its economic size. This translates into emerging consumers, especially in countries like Vietnam. As people get wealthier, they start moving more money into discretionary rather than staple goods,” says Treves.

“In markets such as Singapore, we look at banks. They may be less dynamic than the financial institutions in other parts of the region due to their more developed economies, but they have good yields, high-quality managers and robust balance sheets — something we can enjoy. In Indonesia, where the population is bigger and less wealthy, investors may find financial franchises that present growth opportunities.”

Another catalyst is trade. Asean is currently the fourth largest trading group globally, says Treves. “When I was a child, nothing I owned was made in China. They were all made in Hong Kong, Taiwan or South Korea. As China opened up and the manufacturing sector grew, the country became the low-cost manufacturer of choice for the world. Then, the Chinese economic miracle happened, which means it became a relatively more expensive place to make things quickly.”

According to JP Morgan’s data, workers in Thailand, Indonesia and Vietnam are now cheaper than those in China. Chinese companies are now manufacturing and assembling products in countries like Vietnam, where the cost of labour is half of that in China.

“I think what have sped things up are the trade tensions, which have caused companies to accelerate their capacities outside mainland China and into Asean. Will the money flow back to China if it reaches a trade deal with the US? We do not think so because other places are cheaper and also because the US and China are moving from a unipolar world to a multi-polar one,” says Treves.

“Trade will be at the epicentre of that for some time because of issues such as intellectual property transfer. It is worth remembering that this is one of the rare issues that the US has bipartisan support for.”

He adds that executives in China looking to make investment decisions will want to keep moving things away from the mainland due to the trade tensions risk. According to JP Morgan’s 2018 data, South Korean companies spent more on foreign direct investment (FDI) in Vietnam than in China.

“Vietnam is a much smaller country and way less populous than China. It has fewer manufacturing nodes and hubs than China. But South Korean companies are spending a lot of money there,” says Treves.

Indonesia is another interesting country to look at. It has seen huge improvements in infrastructure, lowering logistical costs and potentially driving FDI. In 2008, infrastructure was less than 1.6% of the country’s GDP. A decade later, it has increased to about 2.7%.

“Between 1998 and 2004, under a different government, there were very small additions to toll roads in Indonesia. Over six years on aggregate, there were only 47km of toll roads built. In 2019, we forecast 871km — a totally different magnitude,” says Treves.

Indonesia is No 46 on the 2018 Logistics Performance Index, up from No 63 in 2016. Thailand rose to No 32 from No 45 while Vietnam moved up to No 39 from No 64. During the same period, India, South Korea and Taiwan did not move much in the rankings. This does not mean these countries are not improving, says Treves. It is just that other countries are improving faster.

“Logistics is crucial because if Chinese companies want to make more things outside of China, they need to make them in places that have the infrastructure to support their businesses. Take India. The attractive part of the stock market is dominated by Indian companies that sell goods and services to local consumers, despite the fact that it is a market with a workforce cheaper than those in Asean. This is partly because it does not have the right logistics,” he says.

At the portfolio level, however, investors should focus on the quality of each company rather than the economy, says Treves. “Not every company in an economic environment is equally good. We are very specific about finding businesses that are attractive in different markets at different points of time.”

To capitalise on the opportunities in Asean, investors can leverage the Manulife ASEAN Equity Fund, which was launched in mid-

October. According to its product highlight sheet, the wholesale feeder fund invests at least 95% of its net asset value in the JPMorgan Funds — ASEAN Equity Fund. The remainder is held in cash, money market instruments and placements of deposits with financial institutions.

The fund is suitable for sophisticated investors with a long-term investment horizon who seek capital appreciation and wish to participate in Asean equity markets. The minimum initial investment amount is RM5,000 (for RM hedged class) or US$5,000 (for US dollar class) while the minimum additional investment amount is RM1,000 or US$1,000. The fund’s benchmark is the MSCI AC ASEAN Index (Total Return Net), which is also the benchmark of the target fund.

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