Tapping the investing potential of south-east Asia
Ask Australians about their next holiday destination, and many will name an ASEAN nation - maybe Indonesia, Vietnam, Thailand, the Philippines or Singapore.
These countries offer vibrant experiences, and are literally on Australia's doorstep.
Yet few of us have these same ASEAN nations in our investment portfolio, and this can mean missing out on opportunities to tap into the growth and diversity these markets offer.
ASEAN (Association of Southeast Asian Nations) is made up of 10 member states - Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
What's remarkable about many of these nations is the rapid growth they are experiencing.
A recent report by the Organisation for Economic Co-operation and Development (OECD) says ASEAN economies have "shown resilience in the face of global uncertainty", standing up well to the challenges of the pandemic, the conflict in Ukraine and a global economic slowdown.
The OECD expects ASEAN's average, real (after inflation) economic growth to reach 4.6% in 2023 and 4.8% in 2024. Vietnam and the Philippines are expected to perform even better, with both forecast to notch up economic growth of 6%-plus through to 2024.
For context, the Reserve Bank expects the Australian economy to grow by just 1.2% this year and 1.4% in 2024.
ASEAN growth isn't expected to slow any time soon. In dollar terms, the combined economic output (GDP) of ASEAN is projected to grow from $US3.6 trillion ($5.5 trillion) in mid-2022 to $US5.6 trillion by 2028. By 2025, the ASEAN bloc is expected to become the world's fourth-largest economic area.
Tan Teng Boo, founder and managing director of Capital Dynamics, believes ASEAN offers three key points of appeal for investors - opportunities for growth, portfolio diversification and attractive asset valuations.
Tapping into the potential
Unlike many developed nations, ASEAN does not have an ageing problem.
"ASEAN nations have a combined population of more than 660 million people. The young population - one in three people are aged below 20 years - is a key factor driving expectations for superior economic growth," says Teng Boo.
"The workforce is young and highly motivated, with a lot of talent across many different industries."
Vince Scully, financial adviser and founder of the online advice firm Life Sherpa, describes ASEAN markets as "the economic powerhouses of the world".
He adds: "Indonesia is the world's fourth largest economy, and having Indonesia in a portfolio is critical to capturing global growth. Yet very few Australians have Indonesia in their portfolio."
In terms of ASEAN more broadly, Scully says: "Investors really need to be there to capture that growth. It's a case of investors asking, 'Can I afford not to be there?'"
Benefits of diversification
Far from relying on the tourist trail, ASEAN nations are broadly engaging in growth industries. Many of these industries are not well represented in the Australian sharemarket, which tends to be dominated by the resources and financials sectors.
The OECD reports that the construction sector is a big driver for Indonesia's economy.
The Thai government is nurturing a number of emerging industries, including bioenergy and biomaterials. Vietnam's growth is being boosted by foreign investment in manufacturing, especially in electronics, machinery and footwear.
Malaysia is set to benefit from increased demand for semiconductors and is already responsible for 7%-10% of global semiconductor output.
Additional diversification comes in the sheer volume of stocks to select from.
"Across ASEAN markets, investors can choose from more than 4000 listed companies, compared to half that number on the ASX," says Teng Boo.
A further differentiator is that ASEAN nations have pursued an approach of "being friendly to all", rather than aligning with any particular power bloc.
Teng Boo says this supports these economies being able to sell their exports to anyone.
"This is especially important given the geo-political tensions we see between the US and China, and it has given ASEAN economies considerable diversity of export markets."
For example, around 14% of ASEAN exports go to China, 13% to the US and 11% to the euro-zone. By not concentrating exports in any one market, ASEAN nations are able to reduce economic risk.
By contrast, Australia relies on a few dominant trading partners. As Teng Boo points out, "China took 34% of Australia's exports in 2022, Japan took 17% and South Korea 8.1%".
The diversification doesn't stop there. As Teng Boo points out, "when we look at ASEAN economies, we find remarkable diversity - across currencies, political systems and economic structures".
Australians may not be unfamiliar with companies listed on ASEAN stock exchanges, but quite a few are well-known brands, such as Singapore Airlines, Shangri-La Hotels and Air Asia.
This lack of familiarity can be an advantage for investors. Teng Boo believes it can mean ASEAN stocks are often overlooked. "This has contributed to attractive valuations, providing opportunities for investors to benefit from value growth."
Managing the downsides
It's worth noting that things can operate a little differently outside Australia. ASEAN nations encompass a range of political systems, and while Thailand and Indonesia have robust democracies, Vietnam is still a communist nation.
It is also common for listed companies across ASEAN markets to have some level of state ownership. Similarly, large companies can have a family as the majority shareholder. Scully believes this isn't necessarily a problem.
"What is good for the family can often be good for the company as a whole," he says.
"So I wouldn't dismiss stocks solely because of this."
According to Life Sherpa's Scully, the key risks of ASEAN markets centre around regulation and transparency. He says investors need to consider: Will the government change the ground rules?
And is the price right?
"It can be hard to really get to the bottom of what you're buying," he adds. "These downsides are part of the reason these markets are classified as 'emerging'."
Teng Boo suggests that diversifying across a variety of ASEAN markets can help investors manage the potential downsides.
Get a slice of the action
An investment in ASEAN markets can be an attractive option for investors hoping to tap into the region's growth potential.
Teng Boo believes the bloc may appeal to self-managed super funds as it provides "a unique opportunity to diversify".
Younger investors can also be well placed to take advantage of potential long-term gains.
The key point, says Teng Boo, is that "investors can start with a small level of exposure to 'wet their feet' in the market, and potentially grow exposure over time".
The challenge lies in deciding which ASEAN markets to invest in, and how to get a slice of the action.
Scully explains that across the full deck of ASEAN nations, some markets such as Laos, Cambodia and Myanmar are hard for retail investors to access.
"These markets don't even appear in big, emerging market indices," he says. "This narrows down the choice more towards Singapore, the Philippines, Thailand, Malaysia and Indonesia."
While the ASX features a number of exchange traded funds (ETFs) with exposure to emerging markets, most track the MSCI Emerging Markets Index, which has a 30% weighting to China. Among ETFs with an Asian theme, several follow the MSCI All Countries Asia Accumulation Index (ex Japan), which has even more of a focus on China (34%).
In terms of ETFs, Scully says: "There is really nothing available that captures ASEAN markets."
He adds that investors keen on investing in the smaller, less developed economies of Asia really need to go through a specific ASEAN-focused managed fund - and that's likely to be an unlisted fund.
Unlike ETFs, which tend to track a market index, unlisted managed funds often take an active approach, seeking value for investors. Scully notes that active management doesn't always add value, but "emerging markets is one of those areas where it often does".
One option for investors interested in adding ASEAN markets to their portfolio is the Capital Dynamics unlisted iCapital ASEAN BTB Fund. It gives Australians an opportunity to invest in a basket of six ASEAN markets spanning Singapore, Malaysia, Vietnam, Thailand, Indonesia and the Philippines.
With a minimum initial investment of $5000, Teng Boo says the fund should be seen as a long-term hold with a focus on capital growth rather than regular distributions. He adds that the i Capital ASEAN Fund is aiming for "returns net of fees in the order of 10% compounded annually over the longer term".
Capital Dynamics is rare among Australian fund managers. Investors have the reassurance that it holds an Australian financial services licence (AFSL) while also being licensed in Malaysia, Singapore and Hong Kong. This gives the fund manager deep, on-the-ground knowledge and experience of the markets it serves.
Investors considering any sort of managed fund should look closely at the product disclosure statement (PDS) to check the fund fees. These fees are fixed; positive returns are not. It's worth noting, too, that as with all international share-based investments, franking credits do not apply.
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