Forgotten Asia: growth stories beyond China and India

What Asia Pacific regions offer compelling stories, asks Cavendish's Liz Evans

No one doubts China is on course to become a pre-eminent global economic superpower within decades and while this is certainly an important issue, it distracts significantly from the Asia Pacific region as a whole.

It is sometimes forgotten many other territories within the region have similar growth stories. While their annual GDP growth rates may not have reached the lofty heights of the regional giants, territories such as Thailand and Indonesia had – prior to the financial crisis – posted solid growth rates outstripping more mature Western markets.

Differences

The difference is that, whereas China and India maintained their remarkable growth rates during the global downturn, many of these other markets – smaller and more export-led – went negative. However, these markets are bouncing back in force with the global economic recovery. More importantly, they are bouncing back from a much lower base than China and India. Various ASEAN stock markets have posted 10%-15% gains, while corporates have enjoyed much higher earnings growth in recent quarters.

This can be explained in part by the sharp improvement most nations in the Asia Pacific region have seen in their export figures for the first quarter, which have outperformed expectations. As a result, we have already seen some first quarter annualised GDP growth figures pass the 10% mark – namely Indonesia and Singapore. These export-led recoveries are being staged despite significant currency appreciation across the region over the last two months in the face of flagging Western currencies. This is good news for dollar-, euro-, and sterling-based investors as the translation effect feeds through to increased earnings.

Territories

As for the expected regional round of interest-rate rises, this now appears to be on the back burner. Most territories will be waiting to follow the US, which has signalled it will not consider a rate rise until the latter part of 2010. Furthermore, in recent months fears have arisen China’s measures to cool down its economy represent an over-tightening. Even in China, there are now expected to be no rate rises for the time being, and other territories are unlikely to want to pre-empt China. Plus, seeing as currencies have already strengthened thanks to other factors, much of the raison d’être of rate rises has been lost; there is a danger rate rises now would cause currencies to appreciate to a counterproductive degree given we are seeing such export-led recoveries. Only Malaysia and Indonesia have so far raised rates, and investors can reasonably expect interest rate rises to be measured over the year.

As a result, capital inflow into the region will remain strong, and much will inevitably end up in equities. Yet the inflow will have a disproportionately positive effect on the smaller markets in the region as opposed to the behemoths.

So there are certainly compelling reasons in general for investors to look further afield within the Asia Pacific region than China and India for the coming year. But what about specific opportunities?

Malaysia

Moving first to Malaysia. The Government has recently announced its ‘Tenth Malaysian Plan’ as part of its ongoing drive to shore up and focus the nation’s economic expansion. The policy – received positively by the markets – involves plans to speed along infrastructure projects, both old and new. As such, infrastructure and cement stocks will be ones to watch for investors here.

Furthermore, improving relations between Malaysia and Singapore bodes well for trade links between the two nations. While Malaysia is rich in land, Singapore is renowned for its highly skilled workforce. Malaysia has recently opened up a bordering tract of land in the hope of attracting Singaporean companies squeezed for space. The two are also embarking on joint ventures in healthcare and property, which should benefit these sectors.

Thailand

In recent months, Thailand has made the news for all the wrong reasons, and it would be reasonable to assume violent clashes in Bangkok spell a warning for investors to stay away, at least for now.

Yet the shaky political situation does not tell the whole picture. Thai companies are performing very well at the moment, as is the Thai economy as a whole. Timing is of central importance here for the investor; while the occupation of central Bangkok by the red-shirts managed to wipe 15% off of the market, this has already been recovered in the wake of the surrender. And Thailand too is enjoying a strong rebound in exports. Thailand’s economic performance has proven resilient enough to match what the political situation has been able to throw at it so far this year, and attentive investors should look to take advantage of this.

Indonesia

Indonesia may well represent the most intriguing proposition for Asia Pacific investors. Its demographic situation is very promising, and contains – to a strong degree – all of the same markers that are discussed with such enthusiasm in the cases of India and China, and the greater Asia region in general. It has a rapidly emerging middle class, which by 2012 is expected to have risen by 50%, representing the addition of 27 million households to its ranks.

It is a nation 235 million strong, with over half (55%) of its population under the age of 30, and one-third under the age of 15. It is currently undergoing a phenomenal period of urbanisation. Ten of its cities already hold upward of a million citizens, and people are currently moving from the countryside to cities at a rate of four million per annum (the entire population of Singapore). By 2030, Jakarta will be one of the two largest cities in the world.

All of this brings with it an increasing move from basic to discretionary spending. Domestic consumption is already very high, making up 63% of the nation’s GDP. While the country has historically been marred by relatively high levels of corruption, the recent re-election of the sitting President promises a new era of stability.

Nonetheless, there are some notes of caution to be sounded here. Indonesia’s market has already enjoyed a very strong run this year. Furthermore, the Government has recently announced quasi capital control measures, signalling a willingness to intervene in order to cool over-expansion. While this is, of course, good in the medium and long term, such measures could adversely affect investors in the short run.

Singapore

Aside from the improving trade links with Malaysia discussed above, Singapore has recently seen the opening of its second ‘Integrated Resort’ complex ‘Marina Bay Sands’. As its economy continues to go from strength to strength, its already impressive tourism industry is set to grow further. Transport, hotel, and property stocks are the ones to watch here.

The Philippines

This Philippines is a market that tends to fall off the radar of the average Western investor. Nonetheless, recent events in the archipelago should force investors to take another look. May’s election results saw the election of Akino, son of the former President and a relatively unknown figure in political circles, yet considered free of any baggage regarding corruption. While investors should wait to see the results of his first few months in power, assuming all goes smoothly, this may be an interesting market for the fourth quarter of 2010.

It is also worth noting the territory posted first quarter GDP of 7.1%, with 7.2% growth expected for the whole of 2010 – up there with the best of them. The Philippine economy is also helped by the large number of Philippinos who work abroad and send remittances home. While this number was expected to take a hit during the global recession, it actually grew at an increasing rate. The demographic appeal is also there: the nation is the world’s 12th most populous, with approximately half of its population under 25 years of age.

The nation also enjoys a strong niche in business process outsourcing – a major growth industry – and is second only to India on this front. Whereas India takes the majority of contracts from Europe in this space, The Philippines hoovers up the majority of contracts in this space from the US. This looks set to play well with the increase in outsourcing we are seeing in the US in the wake of its recession.

All in all, there is plenty in the wider Asia Pacific region – and particularly the ASEAN group – to whet the appetites of investors beyond the obvious lure of China and India.

Liz Evans, Asia Pacific fund manager, Cavendish Asset Management