Three reasons to invest in Asia
With the recession in the Eurozone, investing Asia is becoming more and more attractive. The Asian continent not only has the world’s biggest, but also the world’s youngest population pool. Its growth rates are higher than anywhere else: in 2013, Asian GDP grew 6.3%, while the GDP growth rate for the US was 2.3% and Europe remained flat. Moreover, Asia has very high FX results.
Kelvin Tay, Regional Chief Investment Officer of Southern Asia Pacific at UBS Shanghai, points out that 45% of the Asian population is below 25 years of age, a fact that gives Asia an edge compared to the rest of the world. “When we talk about Asia, we largely divide it into three parts. There is developed Asia, developing Asia and what we call the new frontier markets. Developed Asia includes Hong Kong, Korea, Taiwan and Singapore. The developing parts are India, China, Thailand, Indonesia, Malaysia and the Philippines. The frontier markets are Laos, Vietnam, Myanmar and Cambodia (VLMC).”
According to Mr Tay, who was invited to UBS Luxembourg last week, the disparities between these three regions are extremely wide. “For instance in the case of Singapore, the GDP per capita is about 51,000 USD a year, which means that Singapore is the richest country in the world after Norway. Countries like Myanmar are very, very poor. GDP per capita is below 10,000 USD a year”, he explained.
There are also a lot of differences in terms of investments. In the more mature markets, companies actually pay out more of the earnings as dividends. Growth is limited to” the developing countries, where companies have performed very well in the last three years. “A lot of the money that has been coming to the developing market has been focused on countries with a domestic market share like Indonesia and the Philippines and not on countries with huge exports”, Mr Tay said.
The frontier markets, which only recently opened to investors, are accessible through the private equity row. Myanmar for instance currently is a hot spot for investors, since there are only two stocks listed on the domestic stock exchange. “Investors who are really keen to invest in Myanmar should go via someone’s stocks listed in Thailand or Singapore which have links with Myanmar”, Tay suggests. The analyst recommends investing in companies that are involved in infrastructure projects.
Apart from population and GDP, other big advantages of these Asian countries include their significant FX reserves. In 2008, China had 1.5 trillion USD in reserves; now, as of May 2013, FX reserves have already climbed to 3.5 trillion USD. The FX reserves of literally every Asian country increased during the last five years. “This is quite important. If the world goes through another major cataclysmic event like the Lehman Brothers meltdown”, Tay explains, “…the only region in the world with enough money to stimulate the world market through fiscal policy is basically the Asian region. Europe doesn’t have the money, nor does the US have significant reserves either. Even a small country like the Philippines, has reserves that amount to 72 billion USD.”
Healthy government debt levels are another pro for Asia. The Singapore government for instance issues bonds to develop and create a bonds market, not because they need the money. “Singapore is at a debt surface position. The country with the poorest fundamentals here is India. India has 68% net debt to GDP, but even when you compare India to the developed world, it is still at quite a different level. The US has close to 100% net debt to GDP, Japan 240% and the Eurozone is close to 85%. In contrast, the net debt of the Asian countries is very low.”
As a positive example for a country that has made its way out of a recession, Tay highlighted Indonesia. It was only in June 2006 that the country paid back every single cent it borrowed from the IMF as a result to the Asian financial crisis. “Indonesia did not default. It’s been only seven years since and they have accumulated results of close to 105.3 billion USD. That turnaround has been pretty impressive. Indonesia was the country that was worst hit during the Asian financial crisis. It was common to see four or five presidents over a period of ten years. I always use Indonesia as an example comparable to a country in the EU, that if it were to leave the EU, it could nonetheless recover.”
According to Tay, two risks remain despite this success story, namely missing investments in infrastructure and corruption. “If you don’t tackle corruption, whatever growth you had is going to slow down significantly. Corruption will feed social unrest, not only in Indonesia.” EA