Baring's Soo Hai Lim on Asia’s best recovery story post the credit crunch
Where would you find the world’s third largest population, after China and India, and one of the youngest and fastest growing?
The answer is the Association of South East Asian Nations, known as ASEAN. There are 10 member states. The original five were Singapore, Indonesia, Malaysia, Thailand and the Philippines. The newer members are Vietnam, Laos, Cambodia, Myanmar and Brunei.
Since the disruption of the Asian debt crisis of 1997, which had its centre at the heart of ASEAN, in Thailand and Indonesia, these have been all too ‘forgotten’ markets by international investors. The rapid rise of China and India over the same period has increasingly tended to deepen the shadow cast across their neighbours. But ASEAN is neither small nor sluggish.
A force to be reckoned with
As at January 2010, ASEAN had a total population of 657 million, compared to 503 million in Western Europe and 339 million in the US. It is also a young population. Indonesia, the Philippines and Malaysia have median ages under 30, compared to 35 in China and 45 in Japan.
In the 10 years between 1999 and 2009, the aggregate economy of the member states grew 150% in dollar terms, to reach a total value of $1.3trn – larger than India and about a third the size of China.
Competitive niche
At the heart of the investment case is the competitive niche occupied by many economies in the region. Singapore, for example, arguably the most developed economy, has positioned itself as an alternative private banking centre, not just for wealthy Asians but investors from the Middle East and Europe. It also has a growing tourism industry.
Indonesia, Malaysia and Thailand are major suppliers of commodities to neighbouring countries. Indonesia and Malaysia are the world’s largest exporters of palm oil, while Thailand’s dominance in agriculture produce puts it in a strong position as demand for foodstuffs continues to grow. The Philippines’ most successful export – a well-educated English speaking population, found all around the world – is supporting the economy via the remittance of their hard-earned savings. A linguistic and cultural affinity with the US is also behind the rapidly growing business process outsourcing market.
In addition to the core ASEAN markets, there is the opportunity of exposure to the up-and-coming ‘frontier’ economies of the region. Vietnam, for example, is emerging as an attractive, low-cost alternative to China for companies looking to diversify their manufacturing bases.
Indeed, over the long term, we believe Vietnam’s nascent equity market could well follow China’s meteoric rise.
The ASEAN region’s economic, geographic and demographic diversity ensures it offers a wide variety of opportunity. One current theme is tourism. The ASEAN states are already collectively the world’s second most popular tourist destination after France.
For example
One example of an opportunity in this sector is the $5.5bn Marina Bay Sands Casino in Singapore. This is an integrated resort developed and managed by the Las Vegas Sands Corporation. It includes a large hotel, entertainment, catering, conferencing and retail, on top of the core casino business. Genting Singapore has also recently opened Resorts World at Sentosa, an integrated resort that includes one of the largest Universal Studios theme parks in the world.
The two multi-billion properties are part of a strategy by which Singapore hopes to generate $22bn in annual tourist revenue by 2015. This boost in travel is propelling growth in airlines, particularly low-cost carriers. According to Morgan Stanley, air passenger numbers in the Asia Pacific region are expected to grow at an average annual rate of 7.2% between 2010 and 2014.
ASEAN remains a significant global exporter of agricultural produce. Thailand and Vietnam together account for over half of world rice exports. Some 90% of natural rubber originates in the ASEAN region, and 87% of palm oil. This is of special importance as a single crop lasts for up to 20 years, while it forms the base of the increasing quantities of processed foods marketed to the rapidly expanding middle class consumers in China and India.
Chindonesia
This latter blends into the ‘Chindonesia’ theme – the thesis that ASEAN states are the first beneficiaries of demand for materials and goods needed for economic growth in China and India. Often, ASEAN companies can provide capital equipment, commodities and raw materials at lower cost than competitors who are either further away or operating from developed economies.
Since the Asian debt crisis in 1997/98, the ASEAN states have focused on financial restructuring, deleveraging at both the public and private levels. According to UBS, from a peak of 12.7% in 1998, the non-performing loan ratio will fall to less than 3% by the end of this year. At the same time, banks are well capitalised. The Philippines and Indonesia have among the lowest levels of bank credit of any of the main Asian or G7 economies, while Thailand, Malaysia and Singapore are all significantly below the levels of the US or the UK.
The ASEAN states generally maintain relatively moderate tax regimes. In Singapore, corporate and personal tax rates are 20% or less. The other core states, Indonesia, Thailand, Malaysia and the Philippines all have tax levels lower than either the G7 or China or India.
Excellent base
The combination of sound currencies, low indebtedness and accommodating fiscal policies in my view provide an excellent base for the ASEAN economies to take off. It has further allowed governments to respond aggressively to the risk of recession. Singapore, Thailand and Malaysia have each poured 5%-10% of GDP into fiscal stimulus programmes, while keeping interest rates at 0.7%-2%.
ASEAN’s attributes add up to a considerable investment opportunity – excellent geographic location between China and India, economic diversity, focus on global export, large and youthful population and strong financial foundations. It is a region that deserves to be recognised more fully in investment portfolios.
Soo Hai Lim is manager of the Baring ASEAN Frontiers fund
