As clouds continue to shroud the outlook for global economic growth, the Association of Southeast Asian Nations (ASEAN) remains a bright spot for growth – and investors.
The region is in a good position in terms of debt, has a growing middle class and government policy that is market friendly. ASEAN economies are a bright corner of the global economy, growing at a relatively brisk pace while keeping inflation in check. On balance, most of the region’s economies have robust sovereign balance sheets, lower debt levels than many developed markets and healthy foreign-exchange reserves.
The International Monetary Fund (IMF) expects ASEAN to grow by 6.1 per cent next year – much more than the 0.7 per cent forecast for the eurozone, 2.3 per cent for the US and 3.1 per cent globally. But investment performance is much more than a reflection of economic growth.
ASEAN equity market performance
Source: Datastream and MSCI indices in USD terms as at 30 June 2012
Still smiling in Thailand
Thailand has offered investors some of the strongest equity-market returns since the 2008 financial crisis, with the country’s SET stock index up around 16 per cent year to date.
In a recent Bloomberg Markets survey, Thailand ranked second only to China as the world’s best emerging market for investors, according to a range of factors including market transparency and prospects for growth over the next four years.
Aside from the regional catalysts of youthful demographics, increased consumption and relatively low debt levels, Thailand has benefited from some near-term dynamics such as a quicker-than-expected recovery from severe flooding last year and from a more stable political situation.
Domestic demand continues to be bolstered by the pro-stimulus policies implemented by the populist government of Yingluck Shinawatra, sister of exiled former prime minister, Thaksin. These measures have included an increase in the minimum wage by about 40 per cent in April, a cut in the corporation tax rate from 30 per cent to 23 per cent this year, with a further planned reduction to 20 per cent in 2013, and a whole host of other steps aimed at helping the growing middle class and stimulating consumption.
These are just a few of the reasons why Thailand is soon expected to be one of the next countries to join ‘the trillion dollar club’ of countries that generate a GDP of more than a US$1 trillion a year.
Detroit of the East
Another positive for Thailand has been increased foreign direct investment (FDI), most notably from Japan, into the automotive sector. This has been driven by Japanese automakers seeking to escape a strong yen, energy shortages in Japan after the 2011 Tohoku earthquake and by Thailand’s private sector-led, market-oriented automotive policies, which have seen it become the “Detroit of the East”.
Thailand has been particularly successful in penetrating global and regional automotive production networks and helped by domestic economies of scale for particular models such as one-tonne pick-up trucks. This success has spawned a large-scale parts and components supplier network in the country and benefited industrial-estate developers, which have set up factory parks for the automakers.
The government is also committed to long-term infrastructure projects. Following last year’s floods, the government is building more dams and flood prevention mechanisms, particularly around the capital. Transport investments include rail and highway projects designed to promote Thailand’s position as a logistics and distribution hub for Indochina, connecting China to frontier markets such as Cambodia, Myanmar and Laos. In terms of sectors, this has benefited construction companies and cement producers.
Thailand’s robust rebound has seen inflation tick up to around 2.5 per cent, but this is still viewed as relatively benign and the central bank will likely hold off on rate rises until the end of the year given some of the external uncertainties for the global economy and the recent fall in oil prices. All of which means the robust equity performance from the Land of Smiles will likely continue into this half of 2012, barring any nasty surprises.
Indonesia upgraded
Indonesian equities have been another outperformer since 2008, benefiting from a growing middle class, a calmer political situation, natural resources and an increasing amount of foreign direct investment as more and more people recognise the country’s improvement.
While a host of European countries have seen their sovereign-debt ratings slashed, Indonesia was boosted to investment grade at the beginning of the year by several ratings agencies. The government has said it wants to spend US$18 billion this year on infrastructure, paving the way for sustained earnings growth across a wide mix of companies.
Corporate-earnings results continue to be strong with almost 80 per cent of Q1 2012 results above or in line with expectations. Moreover, a large part of Indonesia’s trade deficit stems from surging imports as people increase their consumption of foreign goods amid rising affluence. Motor-vehicle sales remain robust and credit growth is strong.
On the downside, falling commodity prices have seen the country’s trade surplus turn into deficit.
Singapore pays dividends
Over the past three years, Singapore has reported average quarterly economic growth rates of around 6 per cent, buoyed by robust exports, industrial production, tourism and domestic consumption, a healthy fiscal situation and a stable political environment.
The island nation has been attractive to more defensive investors due to the dividend yields on offer. Dividends in Singapore have seen a compound annual growth rate of 7 per cent from 1990 to 2012.
Not every ASEAN market is destined to catch up with the developed world, nor will every company in every market grow its share value. Rather, you need to look at individual companies to determine which ones will grow best in each market and that should, in turn, be reflected in the growth of their share prices.
Gareth Nicholson is an investment commentator at Fidelity Worldwide Investment.
