Tue, 11 May 2010
With the world transfixed by the growing economic importance of China, SooHai Lim, manager of the Baring ASEAN Frontier Fund, warns that investors only focused on this country could be missing many promising opportunities elsewhere in Asia.

“India and China are already well invested but the countries in the Association of South East Asian Nations (ASEAN) are a neglected and forgotten block, despite having just as compelling investment stories,” he argues. “These countries passed the financial crisis with flying colours - their track record over the last couple of years shows that their restructuring and de-leveraging after the Asian financial crisis of 1998-1999 was not in vain.”

Mr Lim believes that the attractions of these countries before the Asian crisis continue. However, because they are very small they are neglected by investors running funds focused on larger markets, including pan-Asian funds.

Although there are 10 ASEAN member countries, Baring ASEAN Frontiers Fund mainly invests in the countries included in its benchmark, MSCI South East Asia. These include Singapore, Indonesia, Malaysia, Thailand and the Philippines. Over 2009, MSCI South East Asia outperformed the wider region, returning 75 per cent against 69.4 per cent for the MSCI AC Far East ex Japan.

“The gross domestic product (GDP) ratio to equities in these countries is still small so there is potential to improve,” says Mr Lim. “Even though in aggregate the ASEAN countries’ market capitalisation is larger than Korea, Taiwan or Australia, their aggregate MSCI weighting is smaller than Korea and Australia, and marginally bigger than Taiwan’s at 11.4 per cent. Australia’s MSCI weighting is 28.2 per cent in the MSCI Asia Pacific ex Japan index while ASEAN’s is 12 per cent.”

Mr Lim believes the most compelling opportunities are in Indonesia and Singapore, especially following the recent correction. He says Indonesian government and corporate debt is low, and like other ASEAN countries such as Malaysia and the Philippines it boasts a large and young population. Over 2009 MSCI Indonesia was the best performing market in the region with a 127.6 per cent increase.

Indonesian equity markets offer good exposure to the domestic economy, and the fund’s top ten holdings include Astra International, which distributes cars and bikes. This company is also exposed to India and China via subsidiaries, where car buying should increase.

Singapore is set to enjoy a cyclical recovery from both global trade and tourism, and its government now anticipates GDP growth of between 7 and 9 per cent for 2010. The country is one of the most open economies making it the most vulnerable of the ASEAN nations to global economic trends, so it suffered during 2009. However, Mr Lim says it is diversifying its local economy which will reduce its vulnerability.

Singapore has a diversified financial services sector, including private wealth management, and the fund’s top-10 holdings include United Overseas Bank, one of Singapore’s main banks with a well-established regional presence, particularly in Malaysia, Indonesia, Thailand and China. Agribusiness group, Wilmar International, another holding, is listed in Singapore but operates in 20 countries with primary focus on Indonesia, Malaysia, China, India and Europe. It is one of the largest plantation companies in Indonesia and Malaysia, and has a large share of the Chinese cooking oil market.

Valuations

ASEAN markets are trading on a price-to-earnings ratio of around 14 times, after making strong progress in 2009, including Indonesia which a few years ago, following the Asian crisis, was on 9 times. “ASEAN markets have already re-rated but 14 times is not that demanding given the growth prospects,” says Mr Lim. “Up until 2009 Indonesian GDP, for example, grew 5 to 6 per cent a year and could go back to that, or even exceed it in two or three years. The country is still under invested, there is infrastructure to develop and inflation is under control. The country has the potential to be upgraded to investment grade so the market will re-rate.”

Indonesia is currently rated BB by Standard & Poor’s and Ba2 by Moody’s.

Seeking stability

“Political stability and reforms will need to continue of course, politics being a major consideration when investing in these markets”” adds Mr Lim. “You want to ensure that what is done is not undone.”

However political stability varies throughout his investment universe, with next to no instability in Singapore, while ongoing political instability in Thailand currently caps its potential.

Despite this, the fund is slightly overweight Thailand due to attractive valuations and strong fundamentals. Mr Lim believes the economy can handle the current turmoil, with the manufacturing sector recovering this year and domestic consumption boosted by strong farm income, which should create opportunities as valuations fall.

“We do not expect non-domestic earnings to be affected so continue to take a long-term positive view on Thailand,” he says.

Another consideration in some of the ASEAN markets is corporate governance. “There is less transparency in these markets and business is more relationship based, however, in Singapore minority interests are treated much better,” says Mr Lim.

Liquidity is generally not a problem in MSCI South East Asia, except the Philipppines. But it is a problem in some of the frontier markets Mr Lim can include in his fund, examples being ASEAN members, Vietnam and Sri Lanka.

But these have future potential: “Vietnam has a population of more than 88m, GDP per capita is still very low and the country is politically stable, albeit a dictatorship,” says Mr Lim. “GDP growth in 2009 was 5 per cent and I like the long-term prospects, although I do not have much invested there just now.”

He adds that Vietnam is emerging as a low cost alternative to China for manufacturing and its market has the potential to follow China’s rise.



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