China is sticking to its word

China's restructuring is having a huge impact in Southeast Asia. Lars Henriksson explains how foreign investors can benefit.


China Mobile: just one of a host of new deals

Last year, China's political top brass visited Southeast Asia and talked a lot about big investment plans and closer cooperation. A lot of people dismissed this as hot air, but a couple of recent deals suggest that it wasn't just talk. China is following through on its claims and getting involved in Southeast Asia.

And it's having a huge impact on assets in the region.

Well, it's about time! Unlike north Asian markets, where foreign money has flooded in, Southeast Asia has been curiously ignored by foreign companies for the last year. But it looks like that might all be about to change.

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Today, I want to tell you how and why it's going to happen and how foreign investors can benefit.

China has to restructure

Well China is currently in the midst of restructuring its economy. For a long time, China was the cheapest, most competitive country in the region, but after a period of strong growth, this has come to an end. The country now has to deal with higher wages and a shortage of people of suitable working age so they're looking abroad to find ways to lower costs.

So what are their options?

Well, they could look to developed markets, but competition and regulation is high there. On the other hand, emerging markets have a much lower level of competition.

But Southeast Asia has a few qualities that make it more appealing than any other.

Firstly, given its historical links and close proximity, the region is a natural test bed for China's re-structuring exercise.

In economic terms, there are strong links, as many companies in Southeast Asia made investments in China following the Asian financial crisis in 1997/98. Now, when China is catching up, there are plenty of business relationships to build on to accelerate Chinese outward investments in Southeast Asia.

There's also a lot of opportunities becoming available thanks to Western companies losing interest in the region. Recently, many Western companies, particularly banks, have reduced the scale of their operations in Asia, preferring to concentrate on opportunities closer to home. This leaves a lot of room for Chinese companies to get into the region.

Who needs the West?

Let's look at an example the recent deal between China Mobile (941 HK) and Thailand's TRUE Corporation PLC (TRUE TB)

China Mobile a telecoms giant has decided to buy an 18% stake in TRUE Corporation, which is an integrated telecommunications provider in Thailand. This deal will probably lead to increased competition among mobile operators, which is good news for consumers and helps Thailand to move higher on the IT ladder.

And since the announcement, TRUE's share price has jumped 32%

Now the TRUE/China Mobile deal is just one of a host of new deals being announced. I believe this trend and increased interest from Japan and other parts of Asia helps to explain why Southeast Asia is home to the four top-performing markets in the region, namely Indonesia, Philippines, Vietnam and Thailand, gaining more than 12% this year.

In contrast, the S&P500 and CAC40, two top-performing Western markets, have only been able to generate half of that return during the same period.

It's time to do things the old fashioned way

Well, lately they've been missing out on these opportunities. They've been so focused on the geopolitical risk that they're overlooking the fact that corporate China has to restructure.

And if they do decide to get involved, they'll need to fine-tune their investment approach in order to identify the best candidates. It will be essential to collect local intelligence, figure out who owns what among local/regional leaders, and assess local politics.

A few centuries ago, this was the reality for foreign investors. And without a doubt we are moving in that direction again.

I think we can certainly look forward to some more good news coming out of Southeast Asia in the next few months and right now before the masses catch on could be a great time to invest.

Lars is our resident emerging markets expert, with 17 years of 'on the ground' experience hunting down profit opportunities in Asia. Lars spent ten years living in Malaysia and Thailand, seeking out strategic opportunities, before moving to London to manage the Oracle Asia Absolute Fund. In short, Lars has real knowledge of where the opportunities in Asia are. Sign up to his free newsletter, The New World, here.