”One Vision, One Identity, One Community” may be the motto of the Association of Southeast Asian Nations, but it represents an ideal that has yet to be translated, for better or worse, to the political, regulatory and institutional framework that characterises the European Union.
ASEAN itself (the original five comprising Indonesia, Malaysia, the Philippines, Singapore and Thailand, joined later by Brunei, Vietnam, Laos, Myanmar and Cambodia) represent countries that range from developed in the case of Singapore, to emerging as in Indonesia, Malaysia the Philippines and Thailand, to frontier for the remaining. It will require many decades of development if ever, before Cambodia is comparable with Singapore. Despite the vast differences between the countries, the region as a whole represents one of the most dynamic and attractive geographies in the world for investment.
As Asha Mehta, portfolio manager at Acadian Asset Management argues: “There is no doubt that over the past five years, the ASEAN region has grown in importance and capital flows into these markets have been very strong. Some of our most meaningful positions in both our emerging market strategies and our frontier market strategies have been within some of the ASEAN markets and indeed, the bulk of our emerging market opportunities are in Asia, both Northern Asia and the ASEAN region alongside Korea, India and China.”
Mehta sees the outlook for the ASEAN markets as positive based on compelling underlying fundamentals in terms of both top down and bottom up metrics.
Enthusiastic investors Columbia Management is 8-10% overweight relative to the Asia Pacific benchmark weightings for the region and Senior Portfolio Manager Daisuke Nomoto is an enthusiastic investor for a number of reasons. Firstly, the region has seen GDP growth a couple of percentage points higher than the global average for a few decades (ASEAN averaged 5.1% p.a. from 1980 to 2010 while the global average was 3.3%) and the IMF forecast for the ASEAN-5 is 6.1% for 2013. Secondly, the countries are very resilient - many of the ASEAN countries have current account surpluses and all have low debt/GDP ratios with Indonesia at 25% down from 95% in 2000, 53% in Malaysia and 42% in the Philippines which contrast favourably with the ratios in the US and Europe. The upward trajectory of ASEAN countries’ sovereign credit ratings is in stark contrast to those in the indebted western developed nations; the demographics are also very good with the ratio of the younger generation as a percentage of the total population high (indicating a strong labour force) and an average age that is low, particularly in Indonesia and the Philippines – currently, ASEAN accounts for 10% of the global population but only 3% of the global economy.
A particularly important factor to watch is when the working age group population as a percentage of the total population peaks out (referred to as the Lewis turning point), a tighter labour market emerges. While Japan’s Lewis turning point was in 1990, which has been followed by a harshly muted economic growth rate, Indonesia has a Lewis point in 2020 alongside Vietnam. The Philippines sees the turning point in 2040. Interestingly, China sees it in 2017 over 20 years sooner than India in 2040; many of the countries are also rapidly reaching the sweet spot for rapid increase in domestic consumption, which tends to occur when GDP per capita reaches between $3,000 to $10,000 p.a.
Finally, ASEAN will attract increasing foreign investment, particularly arising from its competitive position with respect to China. ASEAN’s competitive position is increasing rapidly.
Challenges and prospects Accessing the domestic growth story driving the ASEAN markets is not always straightforward. Countries like Myanmar are still very difficult to access directly. Indonesia by itself represents an enormous domestic market – indeed, many foreign companies entering Asia see little benefit in moving outside “Chindonesia” (China, India and Indonesia) since their vast populations dwarf everything else in emerging Asia.
Nomoto finds Indonesian companies (except for natural resource producers) tend to have very little interactions with the rest of ASEAN so investment in Indonesia is essentially focussed on domestic consumption opportunities. He sees Myanmar, Laos and Cambodia all close to or adjacent to Thailand, as forming an investment hinterland accessible through investing in Thai companies: “Myanmar is an interesting country but it is too early to invest in directly as the economy is at an early stage. We do however invest indirectly through for example, an integrated oil/gas producer in Thailand that operates in Myanmar and a cement company in Thailand that is about to tap into Myanmar.”
Malaysia represents developed Asia, to a lesser extent than Singapore, but to a greater extent than Thailand, the Philippines and Indonesia. There is some growth potential in Malaysia but not huge, so Columbia Management is less optimistic on opportunities there.
Vietnam at the other extreme, is also unattractive but for different reasons, Nomoto says. “Vietnam is a relatively small country in terms of GDP. While the underlying consumer market holds considerable potential, it has been unable to build out a value-added manufacturing industry. Given its unattractive current account balance, it is not attractive and we have no investments there.”
Perhaps the biggest downside to the ASEAN region is political uncertainty and corruption. Tensions within ASEAN countries are evident with border clashes between Thailand and Cambodia but more significantly, ASEAN countries face squaring off with China in the South China Sea. Mehta says: “Vietnam is an exporter of oil, and a lot of production is offshore. Vietnam sees itself as entitled to auction off plots within its 200 nautical miles territorial waters, but China claims much of this as within its own sovereignty and is auctioning plots within the same region.”
Indeed, Myanmar joining ASEAN itself is likely to have been a reaction to the alternative of being a client state of China’s. Even in trade with China, there are fundamental issues that will create tensions. The ASEAN–China Free Trade Area was agreed in 2002 but by the time it came into effect in January 2010, China’s high growth rates have led it to a more dominant position than ASEAN may have expected, competing across all export sectors with ASEAN production.
ASEAN’s hope is that rising wage rates in China may swing competitiveness back. But there are also other issues arising from geopolitical tensions. The US is now taking the lead in the development of the Trans-Pacific Partnership, which some see as an attempt by the US to counter China’s soft power in the region. But this initiative may also conflict with ASEAN’s own Regional Comprehensive Economic Partnership, which is an initiative to combine free trade agreements with countries such as China, South Korea, Japan, India, Australia and New Zealand into an integrated regional economic agreement.
Even Thailand, one of the most attractive ASEAN countries for listed equity investments, and also the gateway for the region’s frontier markets, faces dramatic political tensions. The fundamental reasons for the clashes between the rural masses – the reds and the urban elite – the yellows, are deep seated and will take years to resolve.
Jim Stent, former deputy president of the Bank of Asia in Thailand makes the point that Thailand used to be a country characterised by a high degree of ideological homogeneity, with broad consensus at all levels of society on the core values and on what it means to be a Thai. This stable consensus benefited the elite levels of society, a few thousand members of which control what happens in the country. This elite occupies the key positions in the bureaucracy, the military, police, business establishments (particularly banks) and clergy, in both Bangkok and in provincial cities. None of them seek change in the social, political and economic structure that provides them with such a comfortable way of life and position in society, and which has also led to satisfactory growth of the economy and improvement in the lives of the mass of the population. “But a man named Thaksin burst on the scene. And Thailand has never been the same since” declares Stent. In the space of a few years, Thailand became a country deeply-divided.
Thaksin Shinawatra astutely recognised the majority of voters were residents in the countryside, and that they had, over the preceding decades of steady economic development, become a sleeping but nonetheless restless giant just waiting to be awakened. Once awakened, that rural electorate hasn’t returned to sleep. The middle class elite will have to eventually seek reconciliation with the broad masses as Thailand itself transforms into a more democratic and egalitarian country, Stent says. “Gradually reform will be implemented, the older generation yellow shirt die-hards will fade away to be replaced by a younger, more broad-minded elite, and the authoritarian traditions of Thai politics will give way to more stable democracy, as the political structure is brought into line with economic and social development, and tolerance for double standards decreases.”
Corporate governance The overall trend in political tension and corporate governance is positive. Acadian sees less market risk in the ASEAN countries. “Historical volatility has come down over the past couple of years. That is partly due to capital inflows and also the fact that the level of governance has improved. Indonesia stands as a beacon of improved governance,” says Mehta. Clearly corporate governance varies dramatically across the region. Singapore has a code of corporate governance that has been in existence for a number of years. It doesn’t mandate companies to behave in a certain way, or to subscribe to these guidelines, but companies have to explain in their annual reports, why they are not in any specific case.
In contrast to Singapore, there is Vietnam with a lot less accountability, transparency and reporting. “By and large, we are seeing better economic policies across the region and a broader commitment to corporate governance with Singapore standing out as the country that seems to have gone the furthest.”
Chart 1: Improvements in governance standards by market: ASEAN, Asia and Emerging Markets transparency standards have improved more in ASEAN than in Asia, or in EM.
Note: Analysis normalises all country scores by setting a common starting point in 2009. Source: Acadian, Transparency International Corruption Perceptions Index
Chart 2: Improvements in governance standards within the ASEAN grouping. Vietnam, Indonesia, and Myanmar have shown relatively strong improvements on corruption metrics.
Note: Analysis normalises all country scores by setting a common starting point in 2009. Source: Acadian, Transparency International Corruption Perceptions Index
Corruption Perceptions Acadian sees corruption as a tax on investors and as a result, they adjust valuations to reflect their estimates of corruption based on the figures from the Transparency International Corruption Perceptions Index. The logic is straightforward, explains Mehta. “Russia trades at a discount and is widely associated with high levels of corruption.”
Columbia Management also has a process that seeks to eliminate problematic companies, says Nomoto. “If the management background is bad, we won’t touch the company. If the historical experience was of bad corporate governance but the company is seen to be improving, we will include it but at a higher risk rating.”
ASEAN’s structural advantages in terms of demography combined with solid finances and a process of developing wider free trade agreements should create substantial borderless opportunities for regional companies. The trends in corporate governance generally look positive. The hope is ASEAN itself as an organisation, can act as a catalyst to spread the best practices of countries like Singapore, throughout the region.
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