The structural drivers behind the ASEAN story seem too good to ignore but are valuations simply too high?
The network of ASEAN countries is so big that, if all the nations were a single entity, it would rank as the tenth largest economy in the world. This region has attracted particular attention from investors lately due to its progressive economic growth prospects, exciting companies and opportunities for development. So, how are fund managers playing the region?
Is it time to allocate?
While the frontier markets of the ASEAN network – Laos, Vietnam, Myanmar and Cambodia (LVMC) – are “structurally interesting”, they are still difficult areas to access, warns Neptune’s Thomas Sinclair.
According to the manager of the group’s Southeast Asia fund, the main route into LVMC is via private equity or some smaller stocks on other exchanges: for example, Cambodian hotel and casino group Nagacorp is listed in Hong Kong.
“In the main, it is hard to find liquidity in those markets, so I focus on the ‘big five’ countries: Malaysia, Singapore, Thailand, Indonesia and the Philippines,” says Sinclair. His fund’s largest regional weighting is Singapore at 28.6%.
“ASEAN works as an economic block and every investment that investors make into that block gives them leverage into the wider ASEAN region,” he adds. He cites Thailand’s geographical proximity and relationship with Myanmar as the best example of this dynamic.
For Sinclair, one of the region’s most compelling factors is its demographics.
“ASEAN has a demographic profile to die for and this is one of the key points for investing in the block. It is the backbone of the region,” he says.
The consumer story is an obvious emerging market play and the ASEAN region is “a market where one can invest every which way to leverage the growth of the consumer,” according to Sinclair. The “astonishing” rates of urbanisation should further drive consumption growth, he adds.
However, stocks in this sector have become expensive and the manager prefers to invest in financials where he sees more reasonable valuations.
For Richard Sennitt, manager of the £293.8m Schroder Asian Income fund, valuations across the ASEAN area as a whole are not as appealing as they were two years ago. This is because the domestic economies have grown faster and more sustainably than large economies elsewhere in the world.
However, there are still opportunities. Like Sinclair, Sennitt’s largest ASEAN country exposure is also to Singapore, where he has 18.7%, overweight his MSCI AC Pacific ex Japan benchmark of 5.7%. The main reason is the country’s exposure to global trade, he says.
While Sennitt remains optimistic on the country’s outlook, certain concerns have been priced in, pushing valuations lower.
“The market has done well but you can see there are pressures starting to build up there; for example, higher labour costs, property costs and rising manufacturing costs,” he says.
Sennitt’s portfolio has a 6.5% exposure to Thailand, where he says valuations also look reasonable.
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