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Ahead of the Curve: ASEAN - the next emerging economy?

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Andrew Graham asks whether the ambitious integration plan of the Association of Southeast Asian Nations will unlock the region’s potential, or whether the complexity of the task will overwhelm any chance of success

At the end of this year, the Association of Southeast Asian Nations (ASEAN) will officially call itself a single market, becoming the seventh largest economy in the world. While its 10 member states – Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – share immense growth possibilities, individually they vary widely in terms of language, culture, politics and economic models. The challenges of this union are significant, but with the move towards a collaborative, EU-style economy, there will be huge opportunities for companies that can look beyond the complexities of integration and exploit the prospective benefits of an expanded market.

In 2010, the ASEAN Economic Community (AEC) was formed to create a single economic market and production base with the free flow of goods, services, investment, capital and labour. ASEAN is now the world’s third-largest consumer market, measured by its population of 620m, attracts more foreign investment than China (€108bn in 2013) and has a combined domestic product in excess of €1.6trn.

In the short term, several sectors and industries will benefit from the growth of the single market. Infrastructure development will be crucial to ensuring the joint venture’s success and governments in the region have made significant commitments to increasing spending. At a company level, there will be many direct beneficiaries of this huge public expenditure.

Manufacturing and logistics sectors are also likely to expand significantly. Several companies have already positioned themselves to benefit from growth opportunities in the region. They include General Motors, which has opened an ASEAN business unit in Singapore for better access to the growing market; and DHL, which plans to increase its warehousing capacity by 2018 in anticipation of increasing logistics requirements.

Looking further ahead, there are other areas of opportunity across all sectors of the economy. The healthcare sector, for example, should benefit as member states move towards providing universal healthcare in partnership with the private sector. The growing middle class within the ASEAN region in particular is expected to fuel demand for more, and better quality, healthcare services. 

Cosmetics makers should also benefit as the single market encourages integration of standards, with common definitions for labelling requirements and industry standards, making ASEAN producers better placed to penetrate each other’s markets.

The biggest challenge of the single market is in bringing together 10 disparate nations into a cohesive whole. Each one is at a different stage in terms of economic development. In Cambodia, two-thirds of the population lack electricity, while Singapore’s citizens are among the richest in the world. Addressing economic nationalism and a long history of political mistrust among many of the participants will not be a short-term project. Indeed, possible threats to the AEC’s success are if narrower national interests consistently take precedence over a broader regional vision.

There is also a question mark over the ability of the AEC to enforce configuration and regulations. There is no planned single currency or governing authority – so it remains to be seen if the so-called ‘ASEAN way’, focusing on a consensus-based approach, and avoiding interference in ‘domestic’ affairs, will be effective. There is also the danger that an inability to enforce regulations could potentially set off a race to the bottom as labour, environmental and other regulatory standards are lowered to attract businesses.

The AEC has ample growth potential. But the challenges associated with unlocking it are equally apparent. From a stockpicking perspective, the development of a single economic market will undoubtedly create winners (and losers) across a vast range of sectors and industries. Focusing on high quality, well-run businesses, backed up by in-depth regional expertise, is crucial to determining companies that are able to deliver sustainable returns for investors, as well as those that are not.

Andrew Graham is lead manager of the Martin Currie Asia Pacific and Asia Long-Term Unconstrained strategies

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