SooHai Lim, manager of the Baring ASEAN Frontiers fund, highlights the winners and losers in a region set to undergo profound change.
The long-term investment case for the Association of Southeast Asian Nations (ASEAN) region remains extremely compelling.
This is not only due to the high levels of economic growth in regional economies, but also the strong domestic fundamentals, which we believe will continue to limit exposure to any negative external shocks from the rest of the world.
The countries that make up the ASEAN region, such as Thailand, Singapore, Indonesia and Malaysia, represent some of the most dynamic global economies. Myanmar’s tentative reintroduction into the regional economy is testament to the optimism for the bloc.
Where are the ASEAN sweetspots?
The key reason underpinning our view is that economic growth is being driven by structural change in the form of rising consumer and infrastructure spending.
Rapid urbanisation, a fast-growing population and strong domestic demand are all contributing to this development. The emergence of a new middle class, increasing levels of trade within the region and demand for agricultural exports have also played their part.
Income gains have led to a rapidly growing desire for a range of consumer goods and services. This should support strong and sustainable demand for not only consumer discretionary products, such as appliances and automobiles, but
also areas such as healthcare, housing and tourism.
We expect consumer spending to remain an important driver of markets in the region for many years to come. While there is an expectation of weaker growth for some economies, such as Indonesia, in the short term, we remain confident in the bloc’s long-term structural growth prospects.
Volatility is not new - Indonesia fell by more than 15% in US dollar terms in August, for instance, with the currency coming under particular pressure following deterioration in the trade deficit this year.
However, investors have seen volatility many times in previous years and each time the region has recovered strongly.
In the case of Indonesia, it is our assessment that the current account deficit will begin to improve. We expect weakness in the currency to improve export competitiveness.
However, although much-needed policy reforms are on the table, we believe more still needs to be done and not all of the measures have been particularly well targeted. In view of the uncertainty, we have reduced exposure to Indonesia in favour of Singapore, which typically has more defensive qualities.
We continue to favour
Thailand, in spite of the slight slowdown in the pace of economic growth, for three reasons. First, the fiscal position of the economy is sound. The government remains committed to the roll-out of the 2.2 trillion baht infrastructure spending programme and, while we are uncomfortable with the rice subsidy and certain other policies, the country is less dependent than others on external funding.
Secondly, we believe the increased price competitiveness of exports following the recent decline in the Thai baht leaves the economy well placed to reverse the small current account deficit that exists.
Finally, if we do see a gradual broadening out of global economic growth, led by the US, we think Thailand’s sensitivity to this could mean that it will be an early beneficiary.
We continue to focus on a number of powerful domestic themes, targeting companies with good growth prospects and earnings resilience, that appear well positioned to benefit from the twin drivers of regional growth: rising consumption and ongoing infrastructure investment.
The ASEAN region has historically lagged the likes of China and India in infrastructure investment but we are encouraged by the fact regional governments are beginning to tackle bottlenecks, as they recognise investment in this area is a requisite to supporting economic and population growth.
With China set to continue on its path to more sustainable growth, following the Third Plenum in November, we believe the favourable fundamentals of ASEAN economies will continue to lead to higher relative growth rates and superior equity market returns over the medium and long term.
A number of these regional economies are rich in natural resources and well-placed to continue to benefit from an environment of high food prices. Elsewhere, the tackling of infrastructure bottlenecks should serve to benefit a number of tourism-related sectors.
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