Myanmar: the biggest emerging market story since China

About five years ago I had the fortune to take a month-long tour through Myanmar with a group of Burmese and Japanese friends. For the most part, we travelled on buses relics from Word War II that were crammed with people throughout our trip. Our fellow passengers offered us miniature wooden stools placed in the middle of the aisle to sit down on. And we stared out the window at the strange country that rushed past.

Myanmar absolutely mesmerised me. It is blessed with lush paddy fields, dramatic mountain ranges and people who seemed untouched by the modern world. We'd pass women and children with exquisite white-painted faces from thanaka cream. And almost every corner had an ancient Buddhist temple where local people asked for alms to paint or repair it. I was considering learning Burmese and staying.

For the last month, Myanmar has been back in the spotlight. On 1 April, the country held a landmark by-election, which could soon sweep the recently freed Aung San Suu Kyi to power. If the election is deemed fair, the EU and the US will lift some of their long-standing trade sanctions. Myanmar is also set to float its currency, the kyat, to attract investments and reduce corruption.

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These reforms could bring decades of international isolation to an end. And the country has been swarming with foreign businessmen and politicians in recent weeks. Western companies are queueing up to get into the country, sandwiched between China and India and offering huge potential in energy and tourism. Even David Cameron has announced his intention to visit.

But you can forget China, India and certainly David Cameron. Because Myanmar is part of a far more interesting investment story. In fact, I think that this will be the most exciting story of the next five years. And it promises to deliver some explosive returns for early investors.

What does Myanmar offer?

You can call it Myanmar or Burma (it doesn't matter all that much to the locals I speak to), but this country has long been the subject of colonial interest. A century ago, the British used the Irrawaddy as a back door to the markets of China. Unfortunately the river - which starts in the perennially snow-covered Himalayas and descends a thousand miles to empty into the Bay of Bengal - passes through massive mountain peaks which were inhibited by hostile tribes.

But it still emerged as a major exporter of commodities: hard wood, gems and rice (the world's biggest exporter until the onset of the World War II). However, following independence in 1947 and a flirtation with democracy, Myanmar turned inwards and pursued a mixed ideology of Buddhism and socialism, leading down an economic cul-de-sac it has yet to escape.

Today Myanmar has three things going for it. First, it is a regional transport hub providing an alternative shipping route from Asia to the Middle East, India and Europe, by-passing the Malacca Strait. Second, the development of Myanmar's natural resources will provide energy and food to much of Southeast Asia. And third, rising incomes in Myanmar and the expansion of the transportation network from Bangkok (east-west and north-south) will become a magnet for foreign direct investment inflows to the region.

Those factors place Myanmar right at the heart of the most exciting development in emerging markets since 2001.

The biggest story of the next five years

We are entering the era of the Asian world economy. This era can be dated back to China's entry to the World Trade Organisation in 2001.

China's membership changed Asia. Improved rule of law led to an investment boom, fuelled by capital mainly supplied from other Asian countries. The result was high-octane Chinese economic growth and rapid industrialisation due to competitive labour and land costs and proactive local governments.

The rest of Asia also saw increased intra-regional trade. Smaller neighbours fine-tuned their economic growth models and focused on niches that they can compete and thrive in in a China-dominated Asia. That adaptation is ongoing and the full benefits will be visible over the next few years.

But this won't necessarily be a China-dominated story. Because Asia is changing. China and its economic might scares Myanmar. For the last 12 years China has pursued a Go West' policy sending people, industries and energy demand to China's western hinterland. And there are grave concerns about the ability of the Chinese government to avoid a devastating economic crash I'll explain exactly why China needs such a crash in a forthcoming issue.

Those concerns are now being felt in Myanmar, triggering a strategy shift towards affinity with rest of Southeast Asia. And one development could prove an enormous catalyst for this process.

In 2015 the Association of Southeast Asian Nations (Asean) will reduce the tariffs and other non-trade barriers for member countries. This will create a new economic zone called the Asean Free Trade Area.

Asean, home to 600 million people and $2.5trn in combined GDP, has decided that six of the ten member states will completely abolish taxes on goods. For the newly admitted members, Cambodia, Laos, Vietnam and Myanmar, the 7% VAT on trade goods will be abolished by 2018. In fact, Myanmar will chair Asean in 2014..

The goal is obvious: cut red tape and reduce trade barriers for products and services. And as those trade barriers are removed, we are likely to see a total transformation of this region of Asia. There will be massive investment in infrastructure from ports to factories to facilitate these new trade links. And it will all happen in the next few years. In fact, I think there are parallels here with Eastern Europe in the very early years of European integration.

That's why a delegation of 50 Malaysian businessmen flew into Myanmar last month. They see that 65% of the population is below 35 years of age, of which millions of are employed in neighbouring countries. They have seen how the rest of Asia prospers and enjoys increased political freedom. And the labour cost advantage combined with abundant natural resources makes it an alluring Asian tiger candidate. According to a JETRO survey of companies operating in Asia, labour costs in Myanmar are 55% of the wages in Vietnam, 24% of those in Thailand and 22% of those in China.

That's why bilateral trade between Malaysia and Myanmar stood at US $795m in 2011, an increase of nearly 27% from the previous year, according to Malaysian government figures. And this isn't just a story of Malaysia developing links with Myanmar; bilateral trade is exploding right across the Asean region.

Singapore, for instance, is looking to specialise in service sectors such as biomedical science, offshore private banking and tourism. So it is busy outsourcing its manufacturing base to Iskandar near where I live in Malaysia. For years I've watched vast tracts of land rezoned around the province. And I've followed the development plans as enormous infrastructure projects have been laid out linking warehouses to rail to ports, from one side of the Malacca Strait to the other.

Thailand is following in the footsteps of Malaysia. It is planning to invest large amounts of money to upgrade its ancient railway system. China and Japan are willing to support the push with long-term soft loans.

The end game is simple: bring down logistics costs, spread the economic wealth to new regions and allow Asean to better capitalise on its resources of rice, palm oil, coal, gas and other natural resources as well as its relatively young and inexpensive labour pool.

How to invest in the Asean story

At the moment, there are probably 30-odd stocks scattered across Asia with some Myanmar exposure. Many are moving higher. I am aware of at least three different groups that plan to do something' in Myanmar, suggesting that we can look forward to ways to tap into the market.

But for now, the opportunity lies with those companies helping to foster bilateral trade between Asean countries. That means infrastructure plays. That means transport companies, but also financial companies helping to foster trade. And over the coming weeks and months, I'll introduce you to quite a few of the best stocks in this remarkable story. Stay tuned for that.

This article is taken from MoneyWeek Asia, our FREE email on how to invest profitably in the world's fastest-developing and most exciting region. Sign up to MoneyWeek Asia here.