The region is in a good position in terms of debt, has a growing middle class and government policy that is more market friendly. ASEAN economies are a bright corner of the global economy, growing at a relatively brisk pace while keeping inflation in check. On balance, most of the region’s economies have robust sovereign balance sheets, lower debt levels than many developed markets and healthy foreign exchange reserves.

The International Monetary Fund (IMF) expects ASEAN to grow by 6.1% next year – much more than the 0.7% forecast for the eurozone, 2.3% for the US and 3.1% globally. But investment performance is much more than a reflection of economic growth.

Still smiling in Thailand
Thailand has offered investors some of the strongest equity market returns since the 2008 financial crisis, with the country’s SET stock index up around 16% year-to-date.

In a recent Bloomberg Markets survey, Thailand ranked second only to China as the world’s best emerging market for investors, according to a range of factors including market transparency and prospects for growth over the next four years. Aside from the regional catalysts of youthful demographics, increased consumption and relatively lower debt levels, Thailand has benefited from some near-term dynamics such as a quicker-than-expected recovery from severe flooding last year and from a more stable political situation.

Domestic demand continues to be bolstered by the pro-stimulus policies implemented by the populist government of Yingluck Shinawatra, sister of exiled former Prime Minister Thaksin. These measures have included an increase in the minimum wage by about 40% in April, a cut in the corporation tax rate from 30% to 23% this year with a further planned reduction to 20% in 2013, and a whole host of other steps aimed at helping the growing middle class and stimulating consumption.

These are just a few of the reasons why Indonesia is soon expected to be one of the next countries to join ‘the trillion dollar club’ of countries that generate a GDP of more than a US$1 trillion a year.

Detroit of the east
Another positive for Thailand has been increased foreign direct investment (FDI), most notably from Japan into the automotive sector. This has been driven by Japanese automakers seeking to escape a strong Yen, energy shortages in Japan after the 2011 Tohoku earthquake and by Thailand’s private sector-led, market-oriented automotive policies, which have seen it become the “Detroit of the East”. Thailand has been particularly successful in penetrating global and regional automotive production networks and helped by domestic economies of scale for particular models such as one-tonne pick-up trucks. This success has spawned a large-scale parts and components supplier network in the country and benefited industrial estate developers, which have set up factory parks for the automakers.

The government is also committed to long-term infrastructure projects. Following last year’s floods the government is building more dams and flood prevention mechanisms, particularly around the capital. Transport investments include rail and highway projects designed to promote Thailand’s position as a logistics and distribution hub for Indochina, connecting China to frontier markets such as Cambodia, Myanmar and Laos. In terms of sectors, this has benefited construction companies and cement producers.

Thailand’s robust rebound has seen inflation tick up to around 2.5% but this is still viewed as relatively benign, and the central bank will likely hold off on rate rises until the end of the year given some of the external uncertainties for the global economy and the recent fall in oil prices. All of which means the robust equity performance from the ‘Land of Smiles’ will likely continue into this half of 2012, barring any nasty surprises.

Indonesia upgraded
Indonesian equities have been another outperformer since 2008, benefiting from a growing middle class, a calmer political situation, natural resources and an increasing amount of foreign direct investment as more and more people identify the country’s improvement.

While a host of European countries have seen their sovereign debt ratings slashed, Indonesia was upgraded to investment grade at the turn of the year by several ratings agencies. The government has said it wants to spend US$18 billion this year on infrastructure, paving the way for sustained earnings growth across a wide mix of companies. 
Corporate earnings results continue to be strong with almost 80% of Q1 2012 results above or in-line with expectations. Moreover, a large part of Indonesia’s trade deficit stems from surging imports as people increase their consumption of foreign goods amid rising affluence. Motor vehicle sales remain robust and credit growth is strong.
On the downside, falling commodity prices have seen the country’s trade surplus turn into deficit.
 
Singapore pays dividends
Over the past three years, Singapore has reported average quarterly economic growth rates of around 6%, buoyed by robust exports, industrial production, tourism and domestic consumption, a healthy fiscal situation and a stable political environment.

Singapore has been attractive to more defensive investors due to the dividend yields on offer. Dividends in Singapore have seen a compound annual growth rate of 7% from 1990 to 2012 year-to-date.

Markets or companies?
Not every ASEAN market is destined to catch up with the developed world, nor will every company in every market grow its share value. Rather, you need to look at individual companies to determine which ones will grow best in each market and that should in turn be reflected in the growth of their share price.
Our portfolio managers seek to invest in companies with strong balance sheets, which do not rely on banks for funding. They also look for firms that own assets where supply / demand is tight, which sell products that all of us need on a daily basis, or companies that are doing something truly innovative, which gives them pricing power.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. Prior to making an investment decision, retail investors should seek advice from their financial advisers. Investors should also obtain and consider the Product Disclosure Statements (“PDS”) for any Fidelity fund mentioned in this document. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.  2012 FIL Responsible Entity (Australia) Limited.  Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

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“The objective of this new plan, called OMT (Outright Monetary Transactions) is expected to provide Sovereign states with benefits similar to those provided to European Banks via the Long-Term Refinancing Operations (LTRO) announced last year – lower funding costs, and improved availability of funds.

“High bond rates make it almost impossible for the heavily indebted sovereign states to deleverage, as the heavily indebted sovereign states need to issue more debt in order to pay the high interest cost. This initiative will still leave parts of Europe with low growth, high unemployment and continuing need to de-leverage but the announcement of the new plan has effectively boosted market sentiment, and provided a solution to the continuing refinancing requirements of certain sovereign states.”

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“Not having Asian investments in their portfolio could become a medium- to long-term impediment to savings growth for Australian investors,” Mr Bryant said. 

“Many investors are too complacent about this shortfall, misleading themselves that their portfolio structure and overall investment strategy make up for any lack of Asian investment. 

“They have simply accepted a number of myths about investing in Asia – such as if they are invested in Australian companies, or if they have an international component in their portfolio through US or European equities, then they have exposure to Asia as these are major trading partners of the region. 

“Acceptance of such myths betray a lack of understanding verging on complacency that, if not addressed, could prove costly to their portfolios.” 

Mr Bryant said that while it is generally accepted that this is the Asian century for trade and power, investors haven’t accepted the sense of investing in the region to participate in its inevitable growth. 

“It makes particular sense for Australians to invest in the region because of our growing relationship with Asian countries,” he said. 

“Australia’s four biggest export markets are China, Japan, South Korea and India which, when combined, account for over 53 percent of our exports. Yet only 8.5 percent of our total international investments go to the region [1]. 

“On the other hand, our traditional trading partners, the US and UK, the powerhouses of the nineteenth and twentieth centuries, now only take 9.5 percent of our exports, yet account for 51 percent of our investments [2]. 

“This indicates a blinkered approach that does not recognise time has moved on,” Mr Bryant said. 

He said that he had also heard anecdotal evidence from investors showing that they simply don’t understand the investment realities of Asia. 

“For example, investors seem to think that markets in Asia are less secure than in developed countries because of corruption and weak regulation. 

“In believing this they are overlooking the scandals in Wall Street, London and other western financial and economic centres – including Australia with Storm Financial, Trio and the Australian Wheat Board (AWB) among others. 

“While Asian governance varies enormously country by country, main investment centres such as Japan, Singapore, Hong Kong and Korea, are highly efficient and transparent. 

“Nor do we recognise and give credit to the strength of Asian economies – today Asian central banks collectively hold about half the world’s foreign exchange reserves [3]. 

“Virtually all forecasts and predictions suggest Asia will continue to grow dramatically and, by the middle of this century, experts believe it will account for over half of all global trade. 

“Such evidence means that it simply doesn’t make sense for Australians not to be investing in a region with such strong attributes and outlook,” Mr Bryant said.

[1]   Emerging markets to account for 80% of future global growth: ex-IMF chief, English.news.cn, June 2011

[2]   HSBC survey (Nov 2011)

[3]   ‘Why Invest in Asian Credit?’ PIMCO, May 2012 

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