Get ready for the flood

published 29 January 2013

"I can't believe I still have to do this", says my old friend who manages a successful retail outlet in downtown Bangkok. He looks troubled. This is an experienced and competent man, but once a day he is reduced to the status of a little boy. After closing up the shop, he slowly climbs the stairs to bring the daily proceeds from the cash registers for his ailing mother to count and review. And he knows that as long as she is alive, nothing will change.

In a traditional Asian family business, it's the person who acts as the cashier who is the boss. And they usually keep their cards pretty close to their chest.

In my experience, that's true for big and small businesses alike. Because Southeast Asia is not like the UK. You enjoy a free and open exchange of ideas. In this part of the world, information is more fragmented. Business tycoons tend not to court the media. And businesses prefer to operate beyond the glare of public scrutiny. Even people in the financial industry are guarded about sharing their views on stocks.

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But something interesting has happened in the last few years. As Southeast Asia emerges as an economic power, these Old World values are changing. Increasingly, companies are realising the benefits of opening their books, and companies are queuing up to list on local stock exchanges. Last year, two of the world's biggest initial public offerings (IPOs) came from the Association of Southeast Asian Nations (ASEAN).

That is feeding the number of initial public offerings and capital risings we are seeing in Southeast Asia. The outlook is promising. For instance, in Thailand the operator of Bangkok's sky train system, BTS Group Holdings PCL, plans to raise at least $1.5bn through the flotation of an infrastructure fund. The biggest-ever IPO in Thailand on record was Thai Oil PCL's $784m listing in 2004, according to Dealogic. And in Malaysia, Malakoff is seeking to raise $1bn in the second quarter.

This restructuring boom is being fuelled by cheap credit, low corporate gearing and the radical integration across the ASEAN region. In fact, I see this boom as the third instalment in the Asia story. The first was Asia reaching out to the modern global economy in the 1980-90s. The second was the export and China driven boom of the 2000s. Now we are seeing a restructuring boom. And this is a powerful story.

This integration of the region's capital markets is expected to be completed by 2015, where the goal is to make ASEAN an accessible asset class for the public. It is a new era for Asia capital markets and one which is expected to attract a lot more IPOs and a lot of interest among local and foreign investors. My friend in the retail shop in Bangkok is certainly doing his best to put money aside for his investments. I think you should do the same. That's why I've been writing to you about this region so much in recent months. We've seen how foreign governments are rushing to invest in this region. And we've seen now the ASEAN countries are investing billions to develop their own economies. And believe there are some great ways for British investors to get in on this story.

This is unlikely to change any time soon. Indeed last week, the Bank of Japan (BoJ) agreed to double its inflation target to 2% and ease monetary policy, meeting key demands of Japan's new government. BoJ said that starting it would buy about 13trn ($145bn) in assets each month starting in January 2014. It added that this would continue for as long as was necessary. The plan is similar to measures announced by the US Federal Reserve (FED) in December, which have committed to keep interests low until unemployment remained above 6.5%.

And so a major asset allocation shift is on the horizon. Most of the money since the financial crisis in 2008 has moved into bonds and credits, which now are trading at unprecedented levels. When risks such as the European sovereign debt crisis recede, money will flow into assets with potentially higher returns such as properties and equities. And this region, Southeast Asia, offers truly great returns over the medium term. It's a story that I think every British investor should take an interest in.

It is essential to note the difference between stock exchanges in the West and Asia. Western exchanges are trading venues with no clearing, meaning that they have lost market share due to competition from alternative exchanges. In Asia, listed exchanges such as Bursa Malaysia (BURSA), Hong Kong Exchange (HKE) and Singapore Stock Exchange (SGX) are integrated exchanges, with clearing and trading combined, allowing higher barriers to entry. These are quasi monopolists which explains their relative hefty price/earnings (p/e) multiples (see below).

Bursa revealed recently it would set up exchange-traded bonds, which will allow retail investors to fund Kuala Lumpur's new subway. DanaInfra Nasional Bhd, the state-owned company that's financing the rail network, is kicking off the offerings and plans to complete the sale of Islamic bonds by 8 February. The notes will pay a minimum profit rate of 3.7%, depending on demand and market interest, it said.

Lars is an emerging-markets expert, with many 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.