In June 1866, an adventurous French expedition consisting of two steam-driven gunboats, filled with liquor, flour, guns andother goods, left Saigon and headed up the Mekong River to find a new inland way to China.
It was a treacherous expedition lasting two years. Most men suffered from malaria, dysentery and leeches. The leader died and many others did not recover from their afflictions. But the men that did survivewere the first to map the vast 2,000km of the Mekong, perhaps 5,000km of tributaries and reached Yunnan province in China.
This new highway of commerce into China helped the French gain a prominent position in Asia. And even up to 1891, the French determinedly maintained their claim to this vast region, using it as a trade route to Indo-China. They invested heavily in this trade route, leaving behind a vast rail network.
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More than a century later, a new Mekong mania has started. But this time Asians are leading it. Vast investments are being made in the Mekong region to foster trade.
Infrastructure investments worth $10bn have either been completed or are being completed. Among these are the upgrading of the Phnom Penh to Ho Chi Minh City highway (Cambodia to Vietnam) and the east-west economic corridor that will eventually extend from the Andaman Sea to Da Nang.
Over the next decade, members of the Association of Southeast Asian Nations (Asean) will need approximately $60bn a year to fully address the region's infrastructure needs, according to the Asian Development Bank.
In the past, I have explained why Thailand and its stock market offer a great way to invest in this boom. And today, I want toannounce a new and rather unexpected entrant: Indonesia. This could be a great investment story in the making. As Indonesian companies look to develop vast infrastructure projects in the Mekong region, there were will be excellent opportunities for canny British investors to make serious returns I'll point to a few prime candidates today.
Indonesia makes its move
Indonesia is one of the best performing markets in Asia up 18% this year already. It is fuelled by a large and relatively untapped domestic market and investment led growth ahead of the introduction of the Asean free trade agreement(Afta 2015). As regular readers will know, the introduction of Afta will mean lower tariffs, reduced red tape and better prospects for trade within the group, making the whole Afta bloc more competitive. That is why so many Asian companies are keen to get an early foothold in this area.
What we are witnessing is something similar to the early days of the European Union. There is no talk of a single currency or centralised power. But there is plenty of progress being made in cross-border trade and investment in infrastructure.
This is a theme that has been yielding handsome rewards for investors, which I have highlighted in a number of articles in the past. But what is new is that Indonesia is now endorsing the project as well.
There are two reasons why Indonesia didn't get involved earlier. First, the country has been focused on domestic issues, namely the legacy from colonial times when the Dutch authorities ruled the country as one, despite its 18,000 islands, three time zones and multitude of ethnic groups. In other words, Indonesia has been preoccupied with nation building and strengthening its institutions.
Second, a large chunk of corporate Indonesia was in the hands of the state (and still is) and many private corporations had little incentive to look outside the country due to super-high profitability at home, a lack of local banks facilitating overseas expansions and management teams that probably knew more about the West than Asia. That is now changing dramatically with the drive to implement AFTA 2015 the government is already selling off stakes in state-owned enterprises, and there is increased confidence in the region's capabilities.
Asian companies claiming a stake in the future of Asia
That's why on 24 April, Indonesian president Susilo Bambang Yudhoyono visited the Myanmar president Thein Sein, and the two countries signed memoranda of understanding (MoUs) and discussed bilateral trade. According to local media, the Myanmar president sought deeper bilateral cooperation in tourism, transportation, livestock and fishery, agriculture, energy and electricity. But the government is actually playing catch up here with Indonesia's corporations.
In 2011, Semen Indonesia (SMGR), Indonesia's largest cement producer, bought a 70% stake in Vietnamese Thang Long Cement for $157m. This plant will supply Indonesia and other markets. And now the company is stepping up its Asean expansion as it plans to build a cement plant in Myanmar with a total annual capacity of one million tonnes per year for a total investment consideration of $200m. It is assessing three Myanmar-based companies, looking to make a local joint venture. The plan, according to the company, is to strike a partnership in the second half of this year.
The chief executive Dwi Soetjipto explained these investments with thefollowing observation: "If everyone is in Vietnam and Myanmar and we just play in Indonesia, then, like playing chess, we will be squeezed." And he added, "That's why we put our bishop in Vietnam and our knight in Myanmar."
Siam Cement (SCC), the largest Thai cement producer, has similar plans to expandto its Asean neighbours. It plans to invest $900m over the next three years to build plants in Cambodia, Myanmar and Vietnam.
All this shows that Asean companies are gearing up in preparation for the free trade agreement in 2015. They are securing stakes in a fast-emerging new Asia. The tenmember countries are becoming a global economic pivot point. Between them they have 600 million people and a combined economy worth $2.5trn (set to rise to $4.7trn in 2020). Plus, they're perfectly located between China, India and Japan.
Time to get serious about Asean
So, what should we make of these new Asian investments?
First, I think we will see more initiatives from corporate Indonesia, which will translate into exciting stock opportunities and strengthen the commitment of the biggest country within Asean to support the principles of AFTA 2015.
Second, Asean has huge pent-up demand for infrastructure spending and investment-led growth, which is the key reason why we are so bullish on this part of Asia over the next few years. Take the example of Italian-Thai Development (ITD TB). This company has seen a 173% growth since I first recommended itback in August 2012. Periods with strong investment growth have coincided with bull markets, which was the case in India, Mexico and Russia over the last decade.
Third, the Mekong region is the cutting-edge frontier within Asean and will attract a lot of interest over the next few years. Myanmar will host the XXXVII SEA Games in 2013, the Asean Chairmanship in 2014 and launch its own stock market in 2015. I see the country continuing to draw interest and there is arace among frontier funds and investors to get exposure at a reasonable price.
Fourth, companies within the region often have superior information about what is really going on in neighbouring countries. And they have developed innovative strategies to sell and distribute products and services to customers in less developed economies.
The information advantage combined with robust financial backing and a sanguine outlook for the future make them formidable competitors to Western peers. And if you can keep track of what is really going onin these countries (I'll help you with that) you have a massive information advantage over most British investors.
Finally, the widely touted strategy of investing in Western multinationals with emerging markets exposure is becoming obsolete. A lot of the new investments are taking place either within a region like Asean or intra-region (for example betweenAsiaand Africa, orLatin America, and so forth).
You need to have local knowledge. And you can't just invest in an exchange-traded fund(ETF) or a fund to try and capture the opportunity, because you'll only end up buying stocks exposed to Chinaand blue-chips that won't deliver any real return on your investment.
The best way to invest in this emerging economic zone is to follow what is happening on the ground to buy small companies with little research coverage. Because this is where I think you'll make the 200-300% returns.
This article is taken from The New World, MoneyWeek's FREE regular email of investment ideas and news from Asia and Latin America. Sign up to The New World here.
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