Martin Hutchinson: Gloom has enveloped most of the investment landscape these days, but there is still one region that offers strong growth and serious returns.
I’m talking about Southeast Asia.
There was a time when investors scoffed at the likes of Singapore, Thailand, Malaysia and Indonesia. But no one’s laughing now. The naysayers currently are all too busy pulling their money out of the regions they always assumed were safe – the United States, Europe, and even the trendy BRICs (Brazil, Russia, India, and China).
Indeed, there are precious few flourishing economies in the world today, and none look as promising as the ones you’ll find in Southeast Asia. We’re talking about countries that have pro-market governments, thriving manufacturing sectors, ample natural resources, and – with the exception of Singapore – wage levels that can still grow a great deal before pricing themselves beyond their Western competitors.
That’s quite a lot by today’s standards.
Just take a quick look around the rest of the world and you’ll see what I mean.
Searching for a Savior
U.S. growth has fallen off a cliff and no amount of “stimulus” seems likely to get it back on track. Economic growth in Europe is stalled as well, and the continent is further jeopardized by the potential collapse of Greece and the European Union (EU). Even Australia and Canada, both with strong mineral and energy sectors, seem to be slowing as demand wanes in the wealthy West.
Emerging markets seem like a better bet for our money at first glance, but they, too, have problems when examined more closely.
Brazil and China are battling inflation. Brazil has a government that seems unable to stop spending, while China has a thoroughly corrupt government and a banking system with an enormous hidden bad debt problem. Russia is a snake pit, from which a foreign investor is unlikely to escape alive. And India, while growing rapidly, has a serious inflation problem and a government as corrupt as it is economically inept.
Fortunately, one incandescent bright spot shines through the darkness: Southeast Asia. So let’s take a look at some of the investment opportunities being illuminated.
A Snapshot of Southeast Asia
No doubt, Singapore is Southeast Asia’s star.
It’s a trading and financial services entrepôt that already has the highest level of business integrity in the world. Its government maintains a low-tax regime where health and pension costs are run through the Central Provident Fund, so actuarial risks remain with the individuals.
It also has an innovative approach to social policy. For instance, when the government decided to allow casinos on the island, it imposed a stiff entry fee on the locals – thus ensuring that the social costs of gambling addiction were avoided.
The Singapore economy is set to grow 5% this year and 4.9% in 2012, according to The Economist. That’s a remarkably rapid rate given that the country already is as rich as the European average.
Elsewhere, Thailand has finally elected a stable pro-market government and is expected to grow at around 4.5% this year and next. It is a favorite outsourcing destination for Japanese manufacturers, and wage levels are no higher than in coastal regions of China, making the country highly competitive internationally.
The giant Indonesia, with 250 million people and huge commodity resources, especially in the areas of tropical agriculture and energy, is expected to grow 6.5% this year and 6.3% next year. I’d back Indonesia against any of the BRICS right now – it’s much better run with a smaller government and less corruption.
Finally, Malaysia, which has both commodity wealth and a major, highly skilled manufacturing sector, is expected to grow at 4.5% this year and 4.4% next year.
All of these countries, with the exception of Singapore, are in a global sweet spot income-wise. Their wage costs are not as high as in the United States, Europe, and Japan, which may be a major cause of those countries’ malaise.
At the same time, they’re rich and well-managed enough to have decent systems of governance and property rights – even Indonesia is not the kleptocratic pit it used to be.
For investors new to the region, the best bet is the exchange-traded funds (ETFs) devoted to each country, as few local companies have American depository receipts (ADRs) listed in New York.
Here are five possibilities:
•The iShares MSCI Singapore Index Fund (NYSE:EWS) has net assets of $1.71 billion, a price/earnings (P/E) ratio of 5.5 and an attractive yield of 4.21% — it’s primarily concentrated in financial and real estate sectors.
•The iShares MSCI Malaysia Index Fund (NYSE:EWM) has net assets of $980 million and a slightly higher P/E ratio of 3.92. It gives you substantial exposure to plantations companies, which benefit greatly from rising agricultural prices.
•The iShares MSCI Thailand Investible Market Index Fund (NYSE:THD) at $632 million is smaller and less diverse – its top holdings are the local telecoms company and a cement company.
•Finally Indonesia, the largest economy of the four, is the focus of the Market Vectors Indonesia Index (NYSE:IDX), which has $700 million in assets and is focused on the largest Indonesian companies, has too much bank exposure for my liking. You may alternatively want to look at an actively managed fund, the Aberdeen Indonesia Fund (AMEX:IF), which has been in business since 1990 and has a more balanced portfolio.
Martin is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of the Financial Services Volunteer Corps, Hutchinson became an advisor to the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.
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