Investors hungry for higher returns are homing in on the fast-growing
economies of Southeast Asia.
In particular, they are focusing
on the Philippines and Thailand, where stock-market gains have outpaced the
rest of Asia this year. The Philippines' benchmark stock index is up 29.8%, and
Thailand's is up 30%, compared with a 13.1% increase through Friday in the MSCI
Asia ex-Japan index, an Asia-wide benchmark.
The attraction is Southeast
Asia's expanding economy and rising middle class. That is likely to continue to
propel stocks in the region higher next year, said David Gaud, senior portfolio
manager at Edmond de Rothschild Asset Management in Hong Kong, which manages
$1.5 billion in Asia and has most of its Southeast Asian investments in
Indonesia, the Philippines and Thailand.
"The story is still
continuing," Mr. Gaud said, adding that the Philippines and Thailand in
particular are likely to benefit from improving economies. Going into 2013,
"there is no reason for these markets to perform [any] less than they did
this year," he says.
Morgan
Stanley forecasts the four biggest economies of the region—Thailand,
Malaysia, Indonesia and Singapore—will expand by 4.5% in 2013, outpacing the
3.1% global growth estimate for the same period.
Singapore shares have performed
well, up nearly 16% this year, while Indonesian stocks, up 12.6%, are trading
close to all-time highs. Even regional laggard Malaysia, which is up 5% for the
year, has managed to pull off two of the world's largest initial public
offerings in 2012.
Propelling the growth across
Southeast Asia is the rising middle class, defined as those with disposable
income above $3,000 a year. Brokerage CLSA Asia-Pacific Markets estimates that
some 145 million people will be considered middle class in 2015, up from 95
million in 2010. That is likely to fuel increased spending on everything from
food and clothing to travel and gambling. The region also is profiting from
high demand for its commodities, especially from China.
As well, the Philippines and
Thailand are showing signs of political stability, something that hasn't always
been the case.
In the Philippines, investors say
they remain confident in President Benigno Aquino
III. Under his rule, the country has this year won credit-rating upgrades
from Standard & Poor's and Moody's Investors Service to just one notch
below investment grade.
The economy also is strong,
expanding at a 7.1% pace in the third quarter, up from 6% in the previous three
months.
In Bangkok, the survival of Prime
Minister Yingluck Shinawatra's government has helped put a halt to years of
political disruption in Thailand.
Still, a reminder of potential
problems flared up last month as thousands of demonstrators rallied in the
capital against Ms. Yingluck because of what they say is the continuing
influence of her older brother Thaksin Shinawatra, ousted as prime minister in
a 2006 coup.
"We have seen the government
last more than a year and that has certainly been good for stability and
business confidence," said Adithep Vanabriksha, chief investment officer
for Aberdeen
Asset Management in Bangkok, which has assets under management in Thailand
worth around $933 million.
The strong gains in regional
shares, however, have left some markets starting to look expensive, say some
investors. Thailand is trading at 12.6 times earnings for the next 12 months
and Indonesia is at 13.8 times, compared with 10.9 times for the MSCI Asia ex
Japan.
"Valuations compared to the
rest of the region are relatively high, but looking at the visibility that
these countries offer over the next three to five years, they still have a
case," Mr. Gaud said.
Recently, foreign investors have
cooled on Thailand, selling a net 10.19 billion baht ($332 million) worth of
stocks in the first three weeks of November, although they remain net buyers of
36.93 billion baht of stock for this year through Nov. 21.
"There is a decent
possibility that if we look at how these markets play out, you are likely to
see an exodus of people" who will take profits and exit, said Tahnoon
Pasha, chief executive for equities and fixed income for Aviva Investors in
Singapore, which manages assets worth $6 billion in the Asian-Pacific region.
Mr. Pasha says while the solid
growth in the economies of Southeast Asia makes those markets look attractive,
he is skeptical about whether foreign investors will stay.
The region's next challenge may
be maintaining investor interest if sentiment toward China improves. In recent
months, Mr. Pasha has been reducing exposure to the region and investing more
in China as Asia's biggest economy shows signs of improvement.
Overall, though, Southeast Asia
remains attractive to investors, especially as governments spend more on
infrastructure in an effort to reverse years of chronic underinvestment. In
Thailand, the government has implemented large-scale stimulus spending on
reconstruction after last year's deadly floods, while the Philippines has been teaming
up with investors to build expressways and other projects.
"Policy and politics are key
across the region for the successful execution of investment-led growth,"
said Hozefa Topiwalla, Morgan Stanley's head of research and equity strategy
for 10 countries in the Association of Southeast Asian Nations. The bank says
it is "positive" on Thailand, "neutral" on Indonesia and
"negative on Singapore.
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