I had lunch with an old stockbroker friend last week.
He spent a few years working in Asia for a well-known British firm during the 1990s. After returning to London, he went into fund management, but dreamed of going back to Asia in “one form or another”.
After a lengthy consideration and discussions with his contacts (including me), he identified the Mekong region – Southern China, Cambodia, Laos, Myanmar, Thailand and Vietnam – as Asia’s next big growth market. The region, he argued, was endowed with natural resources, was inhabited by people with huge consumer demand and blessed with a strategic location.
In his enthusiasm, he even acquired a website to serve as a gateway for investors looking for an easy way to profit from the Mekong region.
But since then his resolve has begun to weaken, leaving him dangerously close to giving up. This is normally brought on by changes in economics, politics or companies.
It is easy to be jaded. When that happens, it is essential to take stock and see whether things will improve.
I believe the Mekong growth story is just about to be revived. My optimism is based on two recent events that could help revolutionise transport links in the region.
Japan and China are pouring money into the Mekong region
Firstly, as I covered previously, China has offered to help Thailand build a new dual-track railway which will link southern China and Thailand. This will allow greater integration of people, goods and services between China and Thailand and adjacent provinces/countries.
Secondly, the Dawei Port project in Myanmar is back on track.
Dawei is a key city located on the west coast of Myanmar. For the last few years, Myanmar’s government has planned to build a deep-sea port there, along with an industrial estate and road & rail network that stretches to Thailand.
The first phase will cover about 27km2 and cost about Bt20bn, containing a small deep-sea port, electricity plant, liquefied natural gas (LNG) terminal, reservoirs, a township for workers and a road linking the project to the Thai border.
The project was first proposed in 2008, and in 2012, Myanmar and Thailand signed a memorandum of understanding to establish a special economic zone covering 50,531 acres, with a 60-year concession (extendable) and lease period of up to 75 years.
However, after that, news about the project slowed to a trickle, raising concerns it had been scuppered.
That is now about to change. Construction is hoped to start later this year, and the first phase of the project is expected to be ready by 2020-21.
So what happened? Well, as I’ve written previously, the Dawei project would need Chinese or Japanese investment to successfully take off. Japan has now announced that it will provide technical and financial support to Myanmar. Japan is also likely to offer soft loans to finance construction of a 138km road linking the Thai border with Dawei, and has offered to help Thailand build a new 874km railway linking Myanmar with Cambodia.
When China and Japan are gearing up to get directly involved in the Mekong region at the same time, I think it is fair to assume something exciting is about to happen.
I see two strong investment implications.
Stocks in the Mekong region should get a big boost
In the short term, the Mekong region can look forward to improved integration of people, goods and services.
A lot of people will be hired to build the planned infrastructure projects. Increased investment will also create more opportunities to make money by renting out equipment, vehicles and houses.
Furthermore, the improved transport links will attract newcomers from elsewhere who will bring their expertise and capital. The income gap between the provinces and the capitals in the Mekong region will also begin to narrow.
Local stocks in each country should do well from this development. It’s hard to tell how big the potential upside is, but data from Thailand is very encouraging. When GDP per capita reaches $6,000, the consumption of goods and services increases sharply.
In 2013, the proportion of Thai provinces at this point was 13%. By 2020, this is forecast to rise to 59%, according to estimates by Bank of America Merrill Lunch.
I believe a similar effect will take place in other countries in the region.
China and India will do well in the long term
In the long term, Dawei will become the starting point of an enormous series of rail lines, linking Myanmar with Thailand, Cambodia and Vietnam.
Most significantly, the Dawei project shortens the trading distance between India and China.
Indian goods could be shipped from ports in the Indian Ocean to Dawei, transported via road to Bangkok and then taken by rail to southern China.
China and India are both targeting higher GDP growth, and would benefit from increased trade with one another.
The Dawei link would also offer an alternative to the Malacca Strait, which would affect Singapore’s long-term growth potential (which I already warned about two weeks ago).
Sure, things could go still wrong. One important issue to keep track of is the Myanmar election set to be held at the end of this year. It is near impossible to call the outcome due to constitutional changes and lack of polling data.
However, I think regardless of who wins the election, Myanmar will pursue investment-led growth, supported by ample financial and technical support from its Asian neighbours.