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Fund Selector: Is Asean reassuringly expensive?

Fund Selector: Is Asean reassuringly expensive?
 Credit: Reuters

A subset of the emerging markets universe is the Association of Southeast Asian Nations (Asean) bloc – and with an annual rate of growth forecast to come in at 5.2 per cent through 2016-20 it’s clear why it is attracting more attention.

With an increasingly well-educated labour force, underpinned by a favourable geographic location ($5.3trn (£4trn) of trade goes through its waterways each year) and a wealth of natural resources, the Asean bloc is on course to become the fourth largest market by 2030 (behind the US, China and the EU).

Asean represents the third largest Asian trading partner of the US and the single largest destination of US investment – remarkably a beneficiary of more foreign direct investment than China.

The dominant five economies – Indonesia, Malaysia, the Philippines, Singapore and Thailand – received $130bn of foreign direct investment in 2013 and, at 24 per cent, the region also receives the largest amount of outgoing investment from the EU.

Continued improvement of corporate governance, regulation and transparency will need to be maintained to ensure this trend continues – enhancing the attractiveness of the investment case.

All too often, investing in emerging markets is little more than a play on the health of the global economy, but with access to true domestic consumption and intra-regional trade, the intrinsic value of companies within the region should be less vulnerable to the sentiment of global markets than at any time previously.

But with fast growth comes the need for improved infrastructure and utilities. Airports, roads, bridges and ports could see meaningful development in the near future, presenting investment opportunities.

The ‘collapse’ in commodity pricing, most notably the oil price and iron ore, may be a catalyst for infrastructure development. As net importers of oil, the Philippines and Thailand are already seeing benefits of lower oil prices.

Another key growth area will be tourism, with the region benefiting from the Chinese broadening their horizons. A play on Chinese growth without investing directly into China will undoubtedly appeal to certain investors.

However, the issue for the investor is obtaining exposure without paying beyond fair value. A number of domestic stocks trade on multiples of 30x earnings and some north of 50x earnings – pretty rich regardless of how one tries to justify it. 

Domestic demand is a large contribution to GDP but is a relatively small percentage of the index, which recreates a supply and demand imbalance – there are not enough investable companies to satisfy investor demand. However, this dynamic may evolve as the local IPO market picks up, allowing flows to be distributed more widely.

With the global macro outlook remaining less than certain, and western consumption continuing to splutter, it begs the question: what price will investors be willing to pay to obtain true emerging market exposure, partially sheltered from western struggles? It could be argued the Asean region is reassuringly expensive.

 James Sullivan is investment director and senior fund manager at Coram Asset Management