The awakening of Southeast Asia’s Tiger economies
Southeast Asia, a region blessed with huge resources and a surfeit of fast-growing markets, is once again young consumers, ambitious governments – and opportunities for investors. Will the boom last this time?
Cast your mind back 20 years, to a very different world. It’s 1997: Bill Clinton is in his second term, Tony Blair has the keys to No. 10 and Britain has just won the Eurovision Song Contest for the fifth (and very possibly last) time. The West in general is enjoying an era of genuine, golden growth.
Life was also improving in more exotic places. Take Southeast Asia, which spent the 1990s transforming itself from a backpackers’ paradise to an investor’s dream. The region’s ‘Tiger’ economies, led by Malaysia, Thailand and Vietnam, had everything a risk-loving stockpicker needed: oodles of growth, soaring retail spending and (a special boon for investment bankers) companies and governments that were loading up on debt, much of it in US dollars.
Then it all came crashing down. On 2 July 1997, Thailand floated its currency, the baht, triggering the Asian financial crisis. All those expensive borrowings had effectively bankrupted Thailand, and when the baht collapsed, contagion spread across the region. Stock prices slumped and international investors fled, reassigning their capital to the next big thing: dotcom stocks back at home. When fund managers next turned their attention to Asia, several years later, it was to gaze at another marvel of growth creation: China.
Recently though, Southeast Asia (also known as Asean, acronym of the Association of Southeast Asian Nations) has begun to creep back on to investors’ radars for good reason; few parts of the world come close to competing with its growth rates. Indonesia’s economy expanded by 5 per cent in 2016, according to the World Bank; in Vietnam, growth was 6.2 per cent; in the Philippines, 6.9 per cent.
And the demographics are startling, too. The average age of Vietnam’s 92 million population is 30, according to the ever-informative CIA World Factbook. In the Philippines (103 million), it’s just 23.4 years. Compare that with the UK (40.5), or creaky old Germany and Japan (a shade under 47). This matters, because the region is not just young, but hungry for wealth. Vietnam, buzzing after decades of war and economic turbulence, is home to the world’s fastest-growing middle class, projected by the World Bank to make up 33 per cent of the population in 2020, from 20 per cent last year.
It’s a great economy to sell into and to manufacture from, with wage rates half the level of China. ‘There’s nowhere like Vietnam: it’s the last great untapped emerging market,’ says Mike Lynch, head of international sales at Saigon Securities, the country’s largest retail brokerage.
True, investing in Vietnam can be tricky. The market is opening up fast, but the two main bourses, in Ho Chi Minh City and the capital Hanoi, are thinly traded even by regional standards. Get it right, however, and there’s money to be made. The Vietnam Opportunity Fund, a London-listed fund run by VinaCapital, which invests in large-cap stocks such as Vinamilk and carrier VietJet Air, is up 10.8 per cent since the start of this year, and more than 35 per cent over the past 12 months.
‘India has great growth, and China is still robust, but the changes you’re going to see here… over the next five years, are going to be dramatic,’ says Christopher Fitzwilliam-Lay, managing director at VinaCapital. A key moment should come next year, when the index provider MSCI is likely to include Vietnam for the first time on its Emerging Markets Index watch list, ahead of full inclusion by 2020. When that happens, notes one local banker, ‘investment capital will really start to flow in’.
The Philippines is another interesting case study. Its populist president Rodrigo Duterte certainly isn’t everyone’s cup of tea. But his decision to leave the running of the economy to the experts (notably finance minister Carlos Dominguez) is bearing fruit. A tax-reform bill and infrastructure package aims to boost income across the board, lifting all boats. Growth is tipped by the IMF to come in at 6.8 per cent this year, rising to 7 per cent by 2022.
Brook Tellwright manages the Waverton Southeast Asian Fund, a $300 million-plus stock-picking fund based in Bangkok that is up 10 per cent in 12 months and almost 55 per cent over the past five years. He says he likes listed companies that are directly plugged into the region’s highly specific growth story. He highlights three of the fund’s biggest holdings: Indonesia’s Bank Tabungan Pensiunan Nasional, which offers basic current and savings accounts to young savers, Singapore-listed Thai Beverage and Bangkok-listed Siam City Cement — the latter two catering to a young population thirsty for better infrastructure, affordable housing, and beer. ‘It’s all about what people want when they emerge into the middle class,’ Tellwright says.
It’s not hard to find Asean-focused funds that will help you profit from this growth story. JPMorgan’s US dollar Asean fund is up 13 per cent year-to-date, and 55 per cent over the past five years, according to Chicago-based investment research firm Morningstar, while Baring’s euro-denominated Asean Frontiers Fund has gained 11 per cent this year, and 48 per cent over five years.
Sterling-denominated funds look even better over a long time horizon. Smith & Williamson’s Oriental Growth Fund is up 98.5 per cent over five years, the Cavendish Asia Pacific Fund 74 per cent and Aviva’s Investors Apac Equity Fund 72 per cent. On a shorter view, this year’s best performer is Old Mutual’s sterling-denominated Asia Pacific Fund, up 32 per cent by early September.
To be sure, the effects of the 1997 crisis still reverberate. Thailand’s currency never regained its former strength: the baht is weaker against the US dollar than it was 20 years ago. Like generals always fighting the last war, regional governments have for too long focused on shoring up foreign exchange reserves (a major cause of the earlier emergency) while doing too little to boost incomes and consumption, or improve infrastructure.
And for all of Asean’s manifest potential and positive attributes, this can still be a thoroughly frustrating region in which to work. The Philippines welcomes foreign investment capital with open arms. So, too, in the main does Vietnam. But elsewhere, the picture is mixed.
Indonesia remains a tough place to do business, while Thailand’s political instability is perpetual. A 2014 coup there stymied growth, and the subsequent military-led regime’s inability to decide when or whether to call an election has probably held back the Thai stock market, whose performance has been comparable to the FTSE250’s rise so far this year, but not as hot as the Bursa Malaysia (up 15 per cent) or the Ho Chi Minh City Stock Index (up more than 20 per cent).
That aside, there is genuine reason to like Southeast Asia. Frontier nations like Vietnam, filled with young and hungry consumers, are pushing for full emerging-market status. And from behind the haunches of the renascent Tigers peek the cub nations of Cambodia, Laos and Myanmar. Of the three, the latter — larger and blessed with ample resources — probably has the most potential. But all stand to benefit from governments that are committed to deregulation and desperate to suck in as much private and public development capital as possible. A portfolio of big-ticket infrastructure projects, notably a high-speed rail line linking Singapore with southern China via Bangkok by 2030, add to the sense that this region of 636 million citizens is being stitched together.
‘I look across Asean, and I see a place that is starting to do the right things: making good decisions, generating its own demand,’ says Brook Tellwright of Waverton. ‘Back in 1997, much of the instability came from the fact that these were export-led economies and little else. They still export, that’s not going to change. But they are far more balanced now: there’s plenty of investing, and consumption, and governance is improving. These are sound reasons to invest here.’