The Association of Southeast
Asian Nations, or ASEAN, is more than just another catchy investment acronym.
ASEAN encompasses an alluring mix of 10 nations including one developed market
(Singapore), several familiar emerging economies, a frontier market and some
markets that are downright hard for U.S. investors to access.
The 10 ASEAN member states are as follows: Brunei,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore,
Thailand and Vietnam. Some ASEAN constituents have already found their way into
other well-known acronyms. For example, Indonesia and Vietnam are members of
CIVETS while the Philippines and Thailand have
found a home in the underrated CAPPT acronym .
At is core, the ASEAN region is the epitome of a
profit/peril conundrum. Even amid a slowing global economy, the ASEAN member
states offer some of the best GDP growth rates in the world. The downside is
several of these countries are next to impossible for U.S. investors to gain
direct exposure to or are home to red flags such as corruption and
under-developed banking and legal systems.
The rewards are there to be had with ASEAN, but use this
guide to invest in the region the right way.
Global X FTSE ASEAN 40 ETF (NYSE: ASEA ) Now
26-months-old, the Global X FTSE ASEAN 40 ETF remains an under-appreciated ETF.
Not only is it one of the few noteworthy multi-country ETFs tracking Asian
nations that does not feature exposure to China, Taiwan or South Korea, the
fund is the only ETF devoted exclusively to ASEAN member states.
That said, ASEA is a play on just five ASEAN countries -
Singapore, Malaysia, Indonesia, Thailand and the Philippines, but the fund's
weight to the Philippines is less than one percent. ASEA tempers its emerging
markets flare with a 37.2 percent weight to Singapore, a developed market. One
critique: It would be nice to see ASEA raise its allocations to Thailand and
the Philippines, which combine for just over 12 percent of the fund's total
weight.
iShares MSCI Singapore Index Fund (NYSE: EWS ) As
one of the few developed markets in a region littered with emerging economies,
Singapore is often viewed as the beacon of stability in the ASEAN lineup. EWS
features an allocation of 47 percent to financials, which might scare off some
investors in this market environment. However, Singapore is one of the
financial centers of the world.
The city-state not only receives more financial foreign
investment than any other major financial center in the world, it receives more
than New York, London, Frankfurt and Switzerland....combined, according
to AlphaVN.com .
That is a telling anecdote and one that underscores the
notion that Singapore is a viable developed market alternative to the U.S. and
Europe. Also consider the Shares MSCI Singapore Small Cap Index Fund (NYSE: EWSS ), which debuted
in January.
Market Vectors Indonesia ETF (NYSE: IDX )
For all of 2012, Indonesia has been an emerging markets
laggard and that much is highlighted by the fact that IDX, the largest of three
Indonesia ETFs, is down nearly 3.7 percent year-to-date while the Vanguard MSCI
Emerging Markets ETF (NYSE: VWO ) is higher by 4.6
percent.
That glum performance aside, IDX has been one of the best
performing ETFs since the March 2009 market bottom and it pays to remember that
Indonesia is Southeast Asia's largest economy. Indonesia's economy grew at 6.3
percent in the first quarter. While that may be the country's most sluggish
pace in six quarters, foreign direct investment surged 30 percent, Reuters
reported .
Investors have a tendency to forget that Indonesia is a
young democracy and that it is still moving toward enhanced transparency and
increased adaptation of free market ideals. The long-term outlook is strong.
Also consider the iShares MSCI Indonesia Investable Market Index Fund (NYSE: EIDO ) and the newly
minted Market Vectors Indonesia Small-Cap ETF (NYSE: IDXJ ).
iShares MSCI Malaysia Index Fund (NYSE: EWM ) The
iShares MSCI Malaysia Index Fund has not been as exciting as some other ETFs
tracking ASEAN nations, but it has also outperformed IDX as well as the major
ETFs tracking non-ASEAN nations such as China, South Korea and Taiwan.
Driven by strong domestic demand, Malaysia expects solid GDP growth in
the second half of this year and it is worth noting country is a
marginal oil exporter. It is also worth noting that Malaysia
has been the top IPO destination in Asia this year .
That trend probably will not last year, but it does
highlight the strength in Malaysian equities relative to larger Asian markets
this year.
iShares MSCI Philippines Investable Market Index Fund
(NYSE: EPHE ) The
iShares MSCI Philippines Investable Market Index Fund was one
of the top-performing non-leveraged ETFs in the first half of the year .
That is not surprising for those investors that have been savvy enough to get
acquainted with the Philippines over the past year.
EPHE trades at a premium to the broader emerging markets
universe, but the fund is worthy of a valuation that some may consider lofty.
There are real catalysts that make EPHE and the Philippines worth embracing. A
current debt-to-GDP ratio of around 50%. Controlled inflation relative to many
other emerging markets. Of course, there is the World Bank GDP growth forecast
of 4.2% this year and 5% in 2013.
Investors also cannot ignore the fact that that
Philippines improving economic and political situations put the
country in prime position for an upgrade to its sovereign credit ratings.
The Philippines also provides an indirect way for
investors to gain exposure, albeit small for the moment, to Cambodia. For
long-term investors, the good news/bad news scenario is that the Philippines is
still heavily impoverished with one of the lowest per capita GDP ratios in the
world. That is bad news on the surface, but the statistic also implies that
with the benefit of a sound fiscal situation, the Philippine government can
invest in avenues to reduce poverty.
iShares MSCI Thailand Investable Market Index Fund (NYSE: THD ) THD
has been one of the best-performing ETFs since the March 2009 market bottom and
despite some political issues of its own in 2010, Thailand is now one of the
more politically stable countries in Southeast Asia. The country shares borders
with Cambodia and Myanmar, meaning investors can grab some access (again, small
and indirect) to those markets.
Broadly speaking, there is a lot to like with Thailand,
Southeast Asia's second-largest economy behind Indonesia. GDP growth is
expected to be in the neighborhood of 5.2 percent to 6.2 percent this year and
inflation is tolerable.
However, there is a bear case regarding Thailand. A senior
economist at the Thailand Development Research Institute said on Monday the
populist policies of the Pheu Thai Party could set Thailand on a to
a Greece-like collapse in "no less than 10 years .
That is a bold proclamation and one that may be colored
by the economist possibly supporting ousted premier Thaksin Shinawatra's Thai
Rak Thai party. For now, Thailand looks nothing like Greece, but despite a
solid economic track record as of late and immense potential going forward,
Thailand does need to address rising unemployment among its young people.
Market Vectors Vietnam ETF (NYSE: VNM ) The
Market Vectors Vietnam ETF was one of the best-performing non-leveraged ETFs
during the first quarter, but the fund gave back some of the gains with a 5.8
percent second-quarter decline. That performance speaks to the fact Vietnam is
a frontier market, implying risk here is higher than with a traditional
emerging market.
VNM's recent woes also underscore slowing economic growth
at the hand's slack bank lending, the byproduct of woefully high inflation seen
in recent years. Still, Vietnam's economy grew 4.7 percent in the second
quarter and inflation has been tamed to the point where the central bank has
lowered the refinancing and discount rates in an effort to spur bolster
domestic growth.
The bull case for VNM and exists in the form of compelling
valuations for Vietnamese equities and the expectation that those
stocks will surge through 2013.
Vietnam is a small equity market with a total market
capitalization of around $40 billion. Vietnamese banks are flush
with excess cash and foreign direct investment has ample room to grow ,
indicating VNM's best days may be forthcoming.
Investors should note there are other multi-country ETFs
on the market that offer exposure to some ASEAN nations. Those funds include
the EGShares Low Volatility Emerging Markets Dividend ETF (NYSE: HILO ), the WisdomTree
Emerging Markets SmallCap Dividend Fund (NYSE: DGS ), the WisdomTree
Emerging Markets Equity Income Fund (NYSE: DEM ), the EGShares
Industrials GEMS ETF (NYSE: IGEM ), the SPDR
S&P Small Cap Emerging Asia Pacific ETF (NYSE: GMFS ), the SPDR
S&P Emerging Asia Pacific ETF (NYSE: GMF ), the iShares
Emerging Markets Dividend Index Fund (NYSE: DVYE ) and the iShares
MSCI Emerging Markets Minimum Volatility Index Fund (NYSE: EEMV ), among others.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.
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