ASEAN Benefits From Infrastructure Boom

Investors became more ‘risk-on’ early in 2013 and ASEAN equity markets have been among the biggest beneficiaries. This should come as no surprise to those investors familiar with the region’s obvious attractions, such as superior growth rates, lower leverage, huge infrastructure spending and the potential for currency appreciation relative to developed western markets. Many ASEAN markets remain within a dividend sweet-spot since cash flows are growing together with falling capital expenditure and gearing levels. ASEAN is also expected to benefit from increased economic integration with the full implementation of a free trade agreement in 2015. Amid the positive backdrop, some headwinds have appeared though in the form of heightened political risk and pockets of overheating. 

THAILAND BUILDING BOOM
Thailand is Asia’s second best performing stock market year-to-date (ex-Japan), driven by continued infrastructure expenditure and Prime Minister Yingluck Shinawatra’s consumption-friendly policies of lifting wages and cutting taxes. Labour shortages, higher wages, and targeted tax rebates have strengthened domestic demand and helped fuel a consumer credit boom. Consumer credit grew 21.6% year-on-year in 2012¹. The country attracts strong foreign direct investment flows, particularly from Japan, and this has continued despite a weaker yen. 

In terms of infrastructure spending, the government’s focus is on modernising its rail network, improving water management systems and expansion of the capital’s main Suvarnabhumi airport. Analysts are sanguine on the prospects for an infrastructure boom in Thailand, saying development of the economy is essential if the government wants the country to be at the epicentre of ASEAN trade integration, set for 2015. A more stable political situation and inclusion of the long-awaited flood management system in the public debt management office borrowing plan, augur well for more government expenditure in this area.

Thailand enjoyed a strong fourth-quarter earnings season, with many companies surprising on the upside. However, some brokerages note that equity valuations – particularly for small cap stocks – are now looking expensive on a historical basis, so careful stock selection and a disciplined buy and sell strategy are recommended. Although there has been some rotation out of ASEAN stock markets (including Thailand) into North Asian markets, such as China, UBS analysts point out that most foreign investors remain “happy” holders of Thailand and that local investors (representing about 75-80% of capital flows) don’t have the ‘north’ option².  

We are positive on companies that will continue to benefit from solid wage growth, robust loan growth and infrastructure projects, such as real estate, consumer banks and construction-related stocks. Outperformance will likely continue but growth momentum may moderate as valuations escalate.

INDONESIA CAN RIDE CURRENCY HEADWINDS
Indonesia has been one of ASEAN’s star stock market performers since the 2008/9 financial crisis, supported by a commodities boom, rising consumption, favourable demographics and supportive government policy (including large government-driven infrastructure projects). However, as the 2014 presidential election draws near, there are some signs of increased political risk and rising investor uncertainty. Indonesia’s government has hinted at curtailing exports of coal to conserve supplies for future domestic demand – this at a time when the voracious resources appetite of China has cooled in line with its new policy focus on quality of growth over quantity. In addition, we don’t expect a big rebound in coal prices given that the seaborne market is well-supplied with little impact seen on prices from a series of recent weather disruptions. 

The government signalled in 2012 it might boost the average minimum wage by as much as 50% in 2013 amid rising economic growth, inflation pressures and labour protests. However, it subsequently backed down, implementing smaller wage increases and allowing about two-thirds of employers to postpone salary hikes until next year³. CLSA analysts argue that potential wage increases in future (and the likely impact on company profits) are more of a concern that the incremental increases of the past year⁴. In addition, a weaker rupiah has compounded inflationary dangers for the economy and there is little sign that the Indonesian central bank will tighten policy. Given the current account deficit, we expect the Indonesia rupiah to remain volatile in 2013. 

All in all though, we remain committed to the secular growth story in Indonesia, driven by an increasingly affluent middle class. A positive consequence of increased wages is increased consumption, and as such we favour consumption-related stocks in addition to infrastructure plays linked to the government’s spending projects and ongoing land reforms.

PHILIPPINES ON A TEAR BUT EXPENSIVE
ASEAN’s star performer this year has been the Philippines, buoyed by GDP growth of at least 6%, overseas worker remittance growth of about 5% and President Benigno Aquino’s wider policy efforts to boost spending on government projects and tackle corruption. According to Bloomberg data⁵, the Philippine Stock Exchange has climbed almost 14% year-to-date, and over a third since May 2012. Political risk has dropped significantly – one example being the removal in June 2012 of Renato Corona, the Philippines former Chief Justice, for masking millions of dollars in assets⁶. Ratings agencies have raised their outlook on the country to positive, citing political stability and economic growth, and central bank governor Amando Tetangco has indicated an investment grade rating could come in the first half this year⁷.

However, the market represents only 6-6.5% of the MSCI All Countries South East Asia Blend benchmark index and valuations currently look expensive on a historical basis. As such, we remain underweight the Philippines.  

MALAYSIA A RELATIVE UNDERPERFORMER
This year’s General Election has seen an increase in political and market uncertainty in Malaysia although economic growth remains resilient, running at an above-forecast 5.6% in 2012. Exports of commodities and manufactured products have weakened but this has been offset by government investment in the form of the Economic Transformation Programme (ETP), which is aimed at growing incomes and moving the country up the value chain. The program focuses on 12 National Key Economic Areas, including amongst others oil, gas, energy, palm oil, rubber financial services and tourism in the Greater Kuala Lumpur/Klang Valley areas⁸. The construction-related projects have boosted both private and public investment. 

Nonetheless, Malaysian equities have underperformed their ASEAN peers (in fact they are the worst performers in Asia year-to-date) and relative valuations now look inexpensive on a historical basis, with stocks trading below their 12-year mean average⁹.  With inflation pressures benign, current valuations could offer some buying opportunities given the ongoing ETP.

SINGAPORE BALANCING ACT
Singapore has implemented a series of tightening measures to cool property market prices while at the same time attempting to rebalance growth in the city state across wider swathes of economic activity. GDP growth in 2012 fell to +1.3% year-on-year compared with +5.2% in 2011, according to official statistics.

On the downside, stricter immigration policies and an aging population are likely to act as dampeners on Singapore’s economic growth. Business costs are expected to increase, specifically for industries which are labour-intensive and rely heavily on foreign labour. Construction, services, manufacturing and marine sectors will continue to suffer from a margins squeeze. On the positive side, and from an equity dividend perspective, the REIT sector still offers yields of around 6% given prevailing low interest rates. Select telecoms stocks also offer high dividend yields.

ASEAN AN ALL-ROUND PERFORMER
At Fidelity we pursue a bottom-up stock selection process and are cognizant that economic growth alone is not the only, or even primary, driver of investment performance. Given an increasingly complex global backdrop for investors, we believe ASEAN remains an attractive all-round performer for stock-pickers, whether they’re looking for attractive growth prospects or simply a good dividend yield.

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