For many, “southeast Asia” conjures up images of white sandy beaches and clear waters. Thailand has been more than happy to brand itself as the “land of smiles.” But are investors smiling? Thailand’s benchmark SET index was down only 0.7 per cent during 2011. So far this year it is up 17 per cent (the FTSE 100, by comparison, is up 5 per cent). Thailand is the world’s largest exporter of rice and rubber and the second largest exporter of sugar. It has a strong infrastructure network and is ranked highly by the International Monetary Fund’s “Ease of Doing Business” index, where it ranks 17th out of 183 countries, only two places behind Australia. Investors should be grinning. Elsewhere, however, prospects are not as good. Burma (also known as Myanmar), the largest country in mainland southeast Asia, is subject to huge levels of political risk with a less than satisfactory legal and judicial framework. The stock market is practically non-existent (a 2011 Reuters article discussing the Myanmar Securities Exchange noted that share prices of the two listed companies were updated manually using a whiteboard and marker pen) and while investment opportunities exist—many at a specific infrastructure project level—the government’s control remains tight. It is a similar situation in Laos, a landlocked communist state with poor infrastructure and a largely agrarian economy. The United Nations Development Programme has Laos on its list of the least developed countries in the world, but aims to lift it off by 2020. Goal number one is to eradicate extreme poverty and hunger. Goal number two is to achieve universal primary education. The government launched a stock market in 2011 to encourage foreign investment but only two companies are listed and liquidity is low. The theory is sound—stock market creates a source of capital which creates jobs and GDP growth—but its lack of initial success only emphasises the difficulties facing Laos. Neighbouring Cambodia has a garment industry, supplying brands such as Gap, Adidas, H&M and Puma and 47 per cent of its exports go to the US. But the factories are staffed by workers who subsist on the low minimum wage. Unless we start paying more for our clothes the wage growth demanded may not materialise. Under wage pressure, the garment industry may look elsewhere for another low-cost labour force. Who said economic growth was easy? Cambodia remains dependent on its agricultural sector and has huge infrastructure development needs. Analysis by Courtiers, the wealth managers, of the competitiveness of emerging market economies, which uses World Economic Forum data, has flagged Vietnam as having the potential for very high growth in national economic output. It has been in the top five for the last four years and Bloomberg recently ranked the country as the most promising frontier market for investors, with strong growth, low currency volatility and a low price-earnings ratio on its stock market index, which suggests that stocks are at a realistic value. Vietnam has two major stock market indices consisting of locally listed companies. It is hard to access them directly as a foreign investor, but it is possible to do so via single-country investment trusts, or exchange-traded funds, though liquidity isn’t a certainty. More sensible would be a small exposure via a broader regional position, reflecting Vietnam’s limited scale. The market cap of the Hanoi Stock Exchange index is 519 trillion Vietnamese dong (about $25bn: more than six times smaller than HSBC). And volatility remains high. The market is up 27 per cent this year to date, but was down 27 per cent in 2011—not for the faint hearted. Large, young populations, low levels of urbanisation and a labour force of predominantly agricultural workers are positive factors, indicating that a country’s developmental potential is high and growth is likely to be fast. Typically, as a country matures, its population gravitates towards urban areas and starts the transition towards a more industry or service-led economy, in addition to improving efficiencies in the agricultural sector. Higher incomes stimulate domestic consumption, and increased investment follows. With this come opportunities to benefit by investing in companies that are positioned to profit from economic growth. As an investor, above all, I value liquidity. I want to have a clear exit strategy, even if I don’t intend to use it for a while. In stock markets in the developed world, liquidity generally abounds; in emerging markets, it is highly prized. At Courtiers, we prefer to make our money in southeast Asia by investing across larger companies, using managers with local knowledge, who look for corporate governance, balance sheet strength and value. And although we like the region, we won’t go overboard. The potential is high but so are the risks.
