Compelling case for investing in Asean region


With Singapore assuming the chairmanship of Asean this year, an increase in local discussions on how Singapore sees the future of the region can be expected.
With Singapore assuming the chairmanship of Asean this year, an increase in local discussions on how Singapore sees the future of the region can be expected. PHOTO: ST FILE
Head of Asean equities at UOB Asset Management, Victor Wong.
Head of Asean equities at UOB Asset Management, Victor Wong.PHOTO: UOB ASSET MANAGEMENT

With Singapore assuming the chairmanship of Asean this year, we can expect increased discussions locally on how Singapore sees the future of the region.

While many companies here are already seizing cross-border business opportunities, retail investors may be wondering how best to capitalise on investment opportunities arising from the region's growth.

At UOB Asset Management, we believe that the case for investing in Asean is a compelling one.

INVESTING IN ASEAN'S GROWTH POTENTIAL

In the past five decades, Asean has made remarkable progress to become an economic powerhouse. According to the Asean Secretariat's data, the region's combined gross domestic product (GDP) of US$2.6 trillion (S$3.4 trillion) in 2016 made it the world's sixth-largest economy. With an annual growth forecast of around 5 per cent, Asean is expected to become the fourth-largest economy by 2030.

Asean's growth has been underpinned by the region's strong fundamentals, such as favourable demographics, rising consumption, foreign investment inflows and increased infrastructure spending. However, this progress has not been all smooth sailing.

The Asian financial crisis in 1997 and the global financial crisis in 2008 dealt heavy blows to the region's economic growth, currencies and financial strength.

Through these crises, governments in Asean learnt key lessons and implemented policy reforms that strengthened their local institutions and financial sectors. This resulted in a more resilient Asean, with healthier foreign exchange reserves and more robust economies.

Looking at Asean's demographics, its combined population of 634 million is the third-largest in the world, after China and India. Its growing middle class and expanding and increasingly skilled workforce are also key to unlocking the region's vast economic potential.

UOB's research estimates that 65 per cent of the Asean population will be classified as middle income by 2030, compared with 29 per cent in 2010. The working population is also expected to grow by 85 million in the next three decades, as highlighted by the Singapore Institute of International Affairs in an Asean@50 report last year.

The growing number of middle-class working adults translates into spending power that bodes well for the growth in consumption demand, especially in Indonesia, the Philippines, Vietnam and Myanmar, which are among the most populous in Asean.

Looking at Vietnam as an example, employment is not only growing but the jobs being created are also higher up the value chain. This is because industries such as electronics are contributing a larger share of the country's exports compared with traditional industries such as textiles.

The transition towards high-value manufacturing means more revenue for Vietnamese companies that produce higher-value products.

These companies also pay higher wages to these workers with higher-value skill sets, which in turn leads to greater purchasing power.

As Asean's middle class continues to grow, consumers will move from spending on basic necessities to larger-ticket items such as automobiles and real estate. They will also likely begin to spend more on travel and to explore savings and investment options to grow their wealth.

Not surprisingly, Asean's vast consumption potential has also attracted the attention of major e-commerce players as more of the region becomes connected digitally. Amazon's recent entry into Singapore through its Prime service and Alibaba's plans to set up a distribution centre in Malaysia are two significant forays into the region. These companies are likely to expand further across Asean.

Foreign investment inflows are another key factor in enhancing Asean's growth. Multi-national companies are expanding in Asean, attracted by the region's market potential.

The Asean Secretariat's data shows that in 2016, Asean received US$98 billion in foreign direct investment (FDI), making it the fifth-largest FDI recipient globally.

Lower manufacturing costs in Asean will continue to attract more companies looking for cheaper alternatives to China. The benefits of the Asean Economic Community's single market model on the region's supply chain will also appeal to these manufacturers. This is likely to drive the growth of manufacturing sectors in countries such as Indonesia and Vietnam.

Lastly, infrastructure spending is poised to become one of Asean's most important growth drivers as governments are spending to boost economic growth. A higher investment into infrastructure enables a country to increase its production and trade output and ultimately to achieve a higher GDP growth rate.

Asean governments have announced bold plans to increase infrastructure spending on large-scale projects, including high-speed railways, expressways, mass transit systems and power plants. Various studies have estimated that Asean will devote more than US$100 billion annually on infrastructure in the next 10 to 15 years that will accelerate trade and productivity growth.

For example, Indonesia is expected to spend 10 per cent of its GDP on infrastructure over five years from 2015 to next year. The country is making significant progress with the Trans-Java toll road network doubling in two years, while the national toll road network is also expected to double in five years. Similarly, in the Philippines, the government plans to increase infrastructure spending to 7 per cent of its GDP.

These investments are partially funded by the government. Indonesia's Budget reform has also cut fuel subsidies while government spending was channelled to infrastructure roll-out. The tax amnesty has contributed to the tax base for the government, which could continue to increase government revenue.

Another significant source of funding comes from China-and Japan-related companies that are actively investing in and financing massive infrastructure projects. For example, China, through its Belt and Road Initiative, is helping to build and finance the US$5 billion Jakarta-Bandung medium-speed railway. Japan is also funding the US$8 billion Jakarta-Surabaya railway and expressway projects in the Philippines.

Asean's massive infrastructure spending will have significant multiplier effects on consumption in the future through increased employment, higher incomes and corporate earnings.

ASEAN'S GROWTH SECTORS

In summary, investors could consider sectors that will benefit from all these growth drivers, such as consumption-driven and consumption-related industries including real estate, telecommunications and tourism.

The financial, infrastructure and healthcare sectors will grow in tandem with Asean's economic development.

Finally, the technology sector would also be interesting for its exposure to e-commerce, disruptive applications and new initiatives such as Singapore's Smart Nation drive to transform the country into a high-tech hub.

Notwithstanding global macroeconomic volatility and continued geopolitical risks, growth drivers for Asean are favourable and the outlook for the region is positive. These factors will ensure that Asean remains an attractive investment option for decades to come.


 • The writer is head of Asean equities at UOB Asset Management.

A version of this article appeared in the print edition of The Sunday Times on February 04, 2018, with the headline 'Compelling case for investing in Asean region'. Subscribe