(Nov 20): Asean equity markets are up 20% year-to-date, in US dollar terms, according to a Nov 13 report by Morgan Stanley Research equity strategists Sean Gardiner and Aarti Shah. That is not a bad show, but it masks differences among the various countries. Singapore has rebounded from a weak 2016, while expectations of reform have prevailed in the Philippines. However, markets such as Indonesia, Thailand and Malaysia have faced “disconnects between improving macro climates and stagnating to deteriorating micro factors”, the report says.
This fragmented landscape presents a unique set of challenges to Asean equity fund managers. The performances of the various Asean equity funds available to retail investors here vary widely too. On a year-to-date basis, the best performer this year is the Templeton Asean Fund A (acc) USD, up 25.3%. The worst performer is the Legg Mason Martin Currie Southeast Asia Trust Class A (SGD) Acc, up 4.9%. Even over longer periods of three and five years, the differences in performance are quite significant. However, when considered over a longer time frame, the betterperforming funds do stand out.
The best performer, in terms of annualised five-year returns, is the JPMorgan Asean Equity Fund. Launched in 2009, the A (acc) USD share class of the fund has generated 4.8% in five-year annualised returns as at Nov 14. It is also the best performer on a three-year basis, with an annualised return of 4.2% over that period.
According to Pauline Ng, head of Asean, emerging markets and Asia-Pacific equities at JP Morgan Asset Management, both geographical and sector- specific factors have contributed to the fund’s performance. “Over the five-year period, positive stock selection across markets, with the strongest contribution coming from Thailand and Indonesia, as well as our structural underweight to Malaysia, drove the fund’s outperformance,” Ng says. “Contributions at the sector level were also broad-based, with financials, industrials and consumer leading the board.”
Other funds that have produced good long-term returns include the LionGlobal South East Asia Fund SGD Class, which has generated an annualised return of 4.2% over the past five years, BGF Asean Leaders Fund Class A2 USD (3.9%), United Asean Fund (2.6%) and the Fidelity Funds — Asean Fund A-USD (2.4%). These funds have a relatively high percentage of their portfolios in financials, infrastructure plays and consumer stocks.
In banks we trust
Confidence in the banking sector is a recurring theme across many Asean funds. In the JPM, Lion Global Investors (LGI) and Fidelity funds, financial plays comprised 40.3%, 37.8% and 33.3% of holdings, respectively, as at Sept 30. Common names among their top holdings are Singapore’s DBS Group Holdings and United Overseas Bank, Thailand’s Kasikornbank and Indonesia’s Bank Rakyat Indonesia (BRI).
JPM’s Ng is optimistic about growth prospects in the Asean banking sector. “We are overweight financials as we see good risk-reward and a better earnings outlook over the next 12 to 18 months,” she says. On Singapore banks, in particular, she adds: “We like Singapore banks as we see an earnings and returns recovery story. Valuations are still reasonable and there is scope for improving returns to shareholders over the medium term, as capital has been building up as a result of the low loan growth in the past few years.”
Gillian Kwek, equities portfolio manager at Fidelity, notes that Asean countries are seeing positive growth in both real and nominal GDP, which means that the region’s banking sector “offers one of the better opportunities around the world”. She adds: “The countries here also have good balance sheets, so we are not concerned about systematic risk. The leverage, by and large, is quite low, other than in Thailand, which is seeing high corporate debt.” Along with the Singapore banks, she also likes Indonesia’s Bank Central Asia (BCA), which comprised 3.5% of her fund as at Sept 30.
“It’s a privately owned bank and has a strong deposit franchise. It also has a proven track record,” she says. “The management is very riskaverse and cautious, but at the same time, they invest a lot in technology in the branch network and the deposit franchise, so it’s very well-positioned. Comparatively, the stateowned banks’ loan deposit ratios are high. So if there is a loan pickup, it would be banks with high liquidity such as BCA that would benefit.”
Soh Chih Kai, director of Asian equities at LGI, is similarly confident about BCA’s growth trajectory, with the stock comprising 3.8% of the LGI fund’s holdings as at Sept 30. He also likes Indonesian banks that cater specifically to homebuyers. BRI, for instance, is a “leader in microlending” with an “unparalleled network” in rural areas that has captured over half of the market share and is difficult for competitors to replicate, he says.
Soh also likes Bank Tabungan Negara, which positions itself as a market leader in low-cost mortgages. “The Indonesian government is a big promoter of low-cost housing. They are trying to provide more homes because there is a lack of supply,” he says, noting that the Indonesian government is introducing a new programme, Tapera, for Indonesians to finance their housing. “The government is going to roll out this programme hopefully by next year. So this will help BTN as well.”
Middle-class momentum
Soh’s optimism on Indonesian banks fits into a broader theme touching the Asean region’s growing middle class. “The banks don’t just lend money to businesses for working capital purposes, but also provide consumer loans for mortgages, automotives, personal loans and credit cards,” he says. He cites data from McKinsey showing that as of 2010, about 67 million households across Asean were recognised as being part of the “consuming class”, that is, they have incomes exceeding the level at which they can make significant discretionary purchases. McKinsey predicts that this number could double to 125 million by 2025.
In line with this, Soh is also optimistic about the future of convenience chain stores in the region. He likes Thailand’s CP All, which operates the 7-Eleven convenience stores in the country. The penetration of convenience stores in Thailand is still not as high as those in Japan and Germany, he says. “The company will continue to grow through store expansion.”
As affluence grows, smartphone penetration is also likely to go up, Soh says. As such, he is also optimistic about the prospects of telecommunications companies. “Even though the mobile penetration in Asean has been quite high now, if you look at the sub-segment of smartphone penetration, it is still below 60%. As e-commerce and social media get more widespread, there’s going to be a need for more data. So communication companies are the ones that will provide the bandwidth.”
Along with consumer stocks and telcos, Soh is betting on real estate plays. In Singapore, the LGI fund is invested in City Developments and UOL Group. “We like them because they have been seeing strong recovery and recent pre-sales,” he says. “These two companies have good land banks that will be able to benefit from the recent upturn in the property cycle we are seeing in Singapore.”
JPM’s Ng says although consumption in some major Asean markets has been weak, a recovery appears to be on the horizon. “Consumption in Indonesia and Thailand has been lacklustre over the past year or so due to poor farm income, cuts in government handouts and higher administered prices. We believe these headwinds are receding and growth should recover from here,” she says.
Road builders and tech disruptors
Infrastructure is another major theme of the Asean growth story, says JPM’s Ng. “Indonesia and Thailand have embarked on infrastructure investment over the past few years, which set the stage for sustainable economic growth over the medium term,” she says. Commenting on Indonesia, she adds: “In the three years of [President] Joko Widodo’s administration, his government has built about 2,600km of roads and spent an amount equivalent to 10 years of the last administration’s.” Similarly, the Thai government has aggressively awarded MRT and rail projects over the past 12 months, Ng adds.
Long-term trends such as China’s Belt and Road Initiative may make infrastructure an even more exciting space for Asean equities. In a Nov 3 report, Maybank Kim Eng Research analysts Chua Hak Bin and Lee Ju Ye say a “step-up in infrastructure investment will complement [a] trade-sparked private investment recovery” in the region. Infrastructure investment is likely to be relatively high in Malaysia, the Philippines and Vietnam.
Fidelity’s Kwek has already invested in a company that is developing industrial parks in Indonesia. “So when more investments go into Indonesia, as the country tries to build more factories as import substitution and for export as well, I think the company will benefit from that,” she says.
LGI’s infrastructure plays include Airports of Thailand, which Soh says holds a monopolistic position and also serves as a “gateway” to the rapidly developing Mekong region.
Finally, the fund managers agree that technology is likely to become an important component of their portfolios. Ng reckons that e-commerce and other emergent technologies will “create new risks and opportunities” for existing players.
One tech-centric small-cap that Fidelity’s Kwek likes is ViTrox Corp, a Malaysian manufacturer of automated vision inspection systems and equipment for the semiconductor and electronics packaging industries. “It’s been doing really well because of [printed circuit boards] getting smaller. This company’s founders have been [investing] in R&D and [the company] grew rapidly in the past three years. They are taking on the bigger competitors in the North Asian space, and have been doing quite well, doubling capacities. I am quite positive about [their growth],” she says.
Interest to grow
Geographically, the fund managers are watching Vietnam as the country gradually opens up to foreign investments. JPM’s Ng already has a small holding of 1.1% in the country, but remains “very selective” about picking stocks there. “We focus on companies that have long-term industry leadership positions in their area, for example in growth sectors such as consumer goods and financial services. We anticipate an interesting IPO pipeline of new opportunities,” she says.
Overall, the fund managers expect interest in Asean equity funds to grow. Soh notes that the region has a proven track record — weathering crises such as the Asian Financial Crisis, the outbreak of SARS in 2003 and various political cycles.
Fidelity’s Kwek reckons this resilience has allowed Asean equities to stand out. “When I first started [working with] Asean-related funds in 2006, they were almost like the poor cousin of Asian equities. Nobody wanted to look at Asean,” she says. “But now it’s quite different, because Asean has proven itself over the past 10 to 15 years. Since the Asian Financial Crisis, balance sheets [have been] healthy and you are talking about 5% to 6% of GDP growth — among the highest in the world. If you are an emerging market investor, you definitely have to look at Asean.”
