Emerging markets (EMs) suffered a shock in the aftermath of Donald Trump's election. Markets fell amid fears that the president-elect's protectionist policies will pose a particular threat to export-led economies and that a stronger US dollar will draw money out of EM equities and bonds. Southeast Asia wasn't immune: the MSCI South East Asia index fell by 5.3% in November, with some individual markets, such as Indonesia and the Philippines, falling by almost 10%.
But despite these short-term concerns, there are still opportunities in the region, according to Brook Tellwright, co-manager of the Waverton Southeast Asian fund. Favourable demographics, notably a large young working population and a growing middle class, mean that economic growth should continue, whether or not Trump follows through on his threats.
Tellwright's favourite markets at the moment are Indonesia and Vietnam. Over the long term, Indonesia is poised to follow in the footsteps of South Korea, Hong Kong and Singapore in benefiting from the accelerated growth of a middle class who have disposable income for the first time, he says. Over the short term, Vietnam also looks promising.
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It has a large young population (half of its 94 million people are under 30) and an established trend of foreign direct investment driving economic expansion. The Vietnamese government is taking steps to open up its market to investors, via the privatisation of state-owned companies (partly driven by a desire to reduce debt) and the relaxation of caps on foreign ownership of many listed companies. The Vietnamese market remains fairly cheap, being the least expensive in the region (with the exception of Singapore, which is a highly developed country with slower growth prospects than most of its neighbours).
Financials and telecommunication companies look especially interesting, says Tellwright. He likes out-of-favour banking stocks in Indonesia, the Philippines and Vietnam specifically mid-tier local banks that aim to grow by serving a vast proportion of people that have not previously had a bank account. New banking licences are hard to come by, so there is a fairly high barrier to entry.
Admittedly, there is likely to be competition from fintech companies and web-based products, but this still leaves room for "tremendous growth" in the penetration of banking services into these populations including the opportunity to sell other products to those with newly acquired bank accounts, such as credit cards, insurance policies and mortgages.
Tellwright has little exposure to consumer staples stocks compared to the fund's benchmark, because the consumer growth story is "so well known" that it is very hard to find firms that aren't already very expensive. For example, firms such as Unilever Indonesia the locally listed subsidiary of the multinational consumer goods giant trade on price/earnings ratio of 40-50 times and are "held by everyone". The risk associated with these companies is "asymmetrically high", meaning the potential rewards are quite low at these levels, even if earnings growth meets expectations although he's open to investing in them in future if valuations become more reasonable.
Roughly 20% of the portfolio is invested in each of Vietnam, Indonesia and the Philippines, while Singapore, Malaysia and Thailand, which together account for 70% of the MSCI South East Asia index, have much smaller weightings. This means the fund is likely to perform very differently to its benchmark. It has returned 27% over five years, compared to 7% for its benchmark.
This is a small fund, with around $22m in assets which should give it more scope to invest in smaller firms and it holds a fairly concentrated portfolio of 26 stocks. Performance could be volatile some volatility is inevitable in these kinds of markets but if the region's prospects appeal to you, it looks a compelling way to invest.
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