Investing in Asean through S'pore

PHOTO: Investing in Asean through S'pore

SINGAPORE - Imagine you are a fund manager sent back in time to 1967 and charged with convincing a large group of investors to put their money in a fund based on the idea that South-east Asia would one day be a stable, cohesive economic region.

Few back then would have ever imagined this part of the world would be the global bright spot it is today. That same year, a group of senior ministers from five South-east Asian nations gathered in Bangkok to form what we know today as ASEAN, the Association of South-east Asian Nations.

ASEAN states were then more concerned with the political turmoil, which was blighting the region, than a pie-in-the-sky notion of regional economic growth. An ongoing war against communism in Indochina, racial and sectarian issues across the Malay archipelago and political instability in some of the world's poorest countries meant South-east Asia was not a region where one would expect to see a great deal of economic integration.

To the north, China was then a large but closed country with few economic links to the outside world and undergoing the painful upheaval of the Cultural Revolution.

Fast forward four decades and it is hard to imagine a more different scenario. ASEAN represents 10 countries from across the region with all their economic, political and demographic diversity. While some of its developing member states such as Myanmar, Cambodia and Laos are some of the world's poorest nations, ASEAN remains a source for economic optimism amid wider concerns about the state of the global economy.

Singapore's place in ASEAN

Singapore, one of ASEAN's five founding member states, is key to the region's dynamism. While it is one of the smallest member states in terms of land-size and population, its status as one of the world's key financial and transportation hubs positions it as an integral piece in the future development of the region.

Capital market activity in South-east Asia has remained robust, with many new listings in the emerging markets of Indonesia, Malaysia, Thailand and the Philippines, defying a general lull in global market activity.

The increasing volumes and market sophistication in the primary exchanges of these countries has enabled local companies, many of them government-linked enterprises, to raise capital through equity markets.

Singapore, by far the most mature and developed financial centre, remains a major hosting venue for many companies with operations in or with major earnings derived out of South-east Asian markets.

Some 52 companies listed on the Singapore Exchange (SGX) with a market capitalisation of more than S$500 million report revenues derived either from ASEAN markets other than Singapore, or consolidated as part of South-east Asian revenues. More than half have generated gains in the year to date when taking into account both price appreciation and dividends.

Twelve of these shares, including Thai Beverage, Jardine Strategic Holdings, Jardine Matheson Holdings and Wilmar International, are constituents of the benchmark Straits Times Index (STI).

Broad range

SGX-listed ASEAN stocks span a broad range of sectors and industries, though there is a heavy focus on food, oil and gas, telcos and utilities.

Companies with exposure to ASEAN markets outside of Singapore have exposure to the growth swings of these developing economies. Rising incomes, growing consumption and the economic advancement of these countries offer scope for greater revenues.

However, companies with such earnings profiles also face more political, currency and economic risks operating in these markets than they would in developed markets such as Singapore.

Singapore's three domestic banks are also invested in the markets of neighbouring ASEAN countries. However, financial services across the region are generally fragmented, with domestic issues shaping how they are expanding within the region.

Singapore banks' recent expansion into these markets has focused on growing middle-class borrowing as well as the emergence of mass affluent and private wealth segments in these countries.

United Overseas Bank (UOB) has the greatest exposure to ASEAN markets ex-Singapore. OCBC Bank has the second largest exposure, followed by DBS Group Holdings.

Economic integration

The scope for much greater integration across ASEAN economies is huge. The combined gross domestic product (GDP) of ASEAN member states last year was US$2.3 trillion, 25 per cent larger than the GDP of India.

ASEAN leaders are seeking to establish the ASEAN Economic Community (AEC) by 2015. Among other things, the AEC seeks to remove trade barriers between ASEAN member states, harmonise national monopoly policies to foster greater regional competition and create greater linkages between ASEAN countries and the rest of the world.

There is therefore room for ASEAN financial markets and regional investment flows to deepen significantly. The FTSE ASEAN 40 Index is a stock index which includes constituents from five ASEAN markets (Singapore, Malaysia, Thailand, Indonesia and the Philippines) with a heavy focus on banks and telecommunications.

The index has generated a total return of 2.3 per cent this year (as at Oct 22). Investors can gain exposure to this index on SGX through the CIMB FTSE ASEAN 40 Index Exchange Traded Fund.

ASEAN as an asset class

In its report released a fortnight ago, the International Monetary Fund forecasted that the economies of the entire ASEAN will grow 5.3 per cent next year, against 3.6 per cent for the global economy and 5.1 per cent for India.

The ASEAN member countries with the highest projected growth rates were Laos at 7.8 per cent and Cambodia at 7.2 per cent.

South-east Asia as a region presents many opportunities for companies and investors - but challenges as well. While challenges and risks exist, economic and political stability has evolved to a point that the region is now considered one of the world's few economic bright spots, leading to an investable asset class in its own right.

Singapore, as a stable and mature financial hub, is the best market for investors seeking exposure to the region.

The writer is SGX's market strategist

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