30th January 2013
The Asean nations, those that belong to the Association of Southeast Asian Nations trading bloc, have become home to an ever increasing amount of Isa (individual savings account) cash, but what are the pros and cons of investing in companies based there asks financial journalist Samantha Soames.
The member states of Asean are some of the most economically dynamic and diverse nations on the globe. Asean member states include Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Burma, Cambodia, Laos and Vietnam.
The economic downturn in the west is partly responsible for investor’s enthusiasm for the region but this, of course,is not the whole story.
Adrian Lowcock, an adviser with Hargreaves Lansdown said: “It’s true the countries benefit from not having had a financial crisis or banking collapse so they can easily borrow money.”
“But more importantly emerging market populations are younger than in the west, have better savings and are generally moving up the class scale so becoming more aspirational in terms of what they want to buy.”
David Coombs, head of multi-asset at investment management company Rathbones said the region was also emerging from the shadow of its behemoth of a neighbour China.
This gives the Asean economies a degree of autonomy which means investing in them does not necessarily result in what Coombs called a ‘China play’. So if you already have a Chinese themed Isa, you will still be spreading your portfolio
He said: “Most of the trade is intra-regional, with the Asean nations. In addition to some well-publicised structural drivers, by 2015, the Asean should have agreements in place that allow people and goods to travel freely cross-border.
So where in the Asean area?
SooHai Lim, manager of the Baring ASEAN Frontiers fund, said of all the Asean nations Indonesia was the‘poster child' and the Philippines has also performed very strongly thanks to growing domestic confidence, and much improved macroeconomic fundamentals.
He said: “The Philippine peso is the best performing Asian currency to date. Thailand is also looking buoyant, with the second highest return on equity in the region; firms in Thailand are benefitting particularly from robust trade flows with the LVMC quartet of ASEAN economies which are Laos, Vietnam, Myanmar and Cambodia."
What funds to look out for?
Coombs recommends Isa investors consider theBaring Asean fund.
“With a population approaching 0.6 billion and a programme of high speed rail links being built across the region. The Baring ASEAN fund is our favoured fund to play this theme.
“The team have a long history of investing in the area and the manager is based in Bangkok, Thailand. The fund was launched in August 2008 and has a meaningful performance track record versus some more opportunistic, ‘me-too’ offerings.”
Lowcock said some active managers have struggled in recent years. He likes Newton Asian Income.
The fund is managed by Jason Pidcock and targets companies with strong balance sheets and good cash flow.
Lowcock said: “Investors are accessing companies which are paying growing dividends over time as well as the growth potential from the region. As Asia and emerging markets are a long term investment then combining an Isa with an income strategy makes a lot of sense to me.”
The countries benefit from not having had a financial crisis or banking collapse so they can easily borrow money. Consumer demand is high and likely to get higher for example Asean region is set to become the sixth biggest automotive market globally by 2018 with vehicle sales almost doubling to nearly 4.7 million units as compared to 2.4 million in 2011 according to auto analysts Frost & Sullivan
Asean nations will continue to grow but the outlook in the US improves this year, then it will also help Asia and emerging markets, simply because the US is a major export region.
There have been significant improvements in corporate governance and practices since the 1998 crisis and shareholder interests have come a long way with many companies targeting dividends and shareholder returns as part of their objectives. This is highlighted by the fact that emerging markets and Asia did not suffer so much during the financial crisis.
It's past performance not necessarily future.
Lowcock said: “Asian and emerging markets have had a good year, only really matched by Europe, however Europe was coming from a low base.”
It’s not cheap
According to Coombs, valuations are quite high, so there are no get-rich-quick pickings for Isa investors.
Currency risk can mean volatility
Lowcock said investors in the region do take on equity risk exposure and currency risk.”If the currency appreciates against sterling then this will benefit. It is not necessarily a negative but can increase volatility of an invest and therefore risk.
Asia and emerging markets are dominated by foreign investors and therefore performance is linked by the confidence of western markets. The decoupling from the west did not happen so investors are exposed to an investment that will perform generally in
the same way as US and UK equities.
Whilst things have improved a lot they are still some way behind the US and Europe.