It’s no surprise to me that stock markets in Southeast Asia – what I
call the “sweet spot” of Pacific Rim growth – are outperforming. While emerging
markets are down so far this year, the Philippines is up 19%, Vietnam has
bounced back 17% and Singapore has risen 13%.
Located south of China and east
of India, this booming region is sometimes overlooked by even the most
sophisticated investors. Yet it represents 10 countries with a population of
600 million and an economic output of $1.7 trillion.
A free trade pact between the
Southeast Asian regional grouping (ASEAN) and China (ASEAN-China Free Trade
Area), took effect in January 2010. By the end of that year, ASEAN exports to
China had leapt 54% and overall trade between these countries jumped 47%. This
free trade area has become the third largest in the world and more than 7,000
products trade at zero tariffs.
The next move is a work led by
China’s prime competitors. The Trans-Pacific Partnership countries – Australia,
Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam and
the United States – announced the achievement of the broad outlines of an
ambitious, twenty-first century Trans-Pacific Partnership agreement that will
supercharge trade and investment in the Pacific Rim.
This agreement will also boost
America’s stake in this vital region. U.S. goods exports to the broader
Asia-Pacific region totaled $775 billion in 2010, a 25% increase over 2009 and
equal to 61% of all U.S. goods exported to the world.
Southeast Asia also sits astride
the biggest trade routes in the world and the two busiest ports, Hong Kong and
Singapore.
The South China Sea links the
Indian Ocean with the western Pacific, but to get there ships need to move
through one of several narrow straits that serve as chokepoints. To put things
in perspective, the oil transported through the Malacca Strait from the Indian
Ocean through the South China Sea, is triple the amount that passes through the
Suez Canal and 15 times the amount that passes through the Panama Canal.
The stakes are high because
roughly 65% of South Korea’s energy supplies, nearly 60% of Japan and Taiwan’s
energy supplies, and about 80% of China’s oil imports come through the South
China Sea. It also has proven oil reserves of seven billion barrels and an
estimated 900 trillion cubic feet of natural gas.
The Probability of Conflict is Low, But Rising
But the importance of these prime
trade routes and the natural resources in the area pose a risk to investors, as
it makes the region a “cockpit” of rising confrontation.
China is intent on pushing its
territorial claims well beyond conventional norms and Law of the Sea
guidelines. Countries affected by China’s overreach, such as Malaysia,
Philippines Taiwan, Brunei and especially Vietnam, aren’t rolling over, but
rather pushing back hard.
Oftentimes the confrontations are
sparked by fishing boats and escalate from there. This is how the recent
standoff between China and the Philippines over Scarborough Shoal began.
In late May, CNOOC (NYSE: CEO), a
Chinese state-owned oil company, announced it was opening nine blocks off
Vietnam’s coast to international bids for oil and gas exploration. These reach
to within 37 nautical miles of Vietnam’s coast, which extends 2,000 miles. Then
on June 21, Vietnam’s parliament passed a maritime law that reinforced its
claims to the Spratly and Paracel Islands. China shot back that this a “serious
violation” of its sovereignty.
The 200 small islands and coral
reefs – only about 40 of which are permanently above water - that support territorial claims are highly
contentious.
The countries that are eye to eye
with China often look to America’s diplomatic and military clout to balance the
scales. Japan and South Korea also have a significant stake in how the dust
settles.
These simmering conflicts rarely
make the front page and shouldn’t discourage you from investing in Southeast
Asia. But they should prompt you to manage risks using wide diversification and
20% sell stops.
Good Investing,
Business & Investment Opportunities
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