slowing global economy - matthews asia · space, with activism against environmental issues, caused...

ASEAN: Finding Growth in a

Slowing Global Economy

Beyond China and India, Asia’s global heavyweights, the continent

harbors yet another dynamic and fast-growing region that remains

relatively unknown: the 10-nation grouping known as ASEAN, or the

Association of South East Asian Nations.

Formed in 1967 to promote regional solidarity and cooperation, and to

collectively leverage its influence in regional affairs, the grouping is broadly

separable into two blocs: “ASEAN-6” and “CLMV”— Cambodia, Laos,

Myanmar and Vietnam. The more developed ASEAN-6 comprises Singapore,

Malaysia, Thailand, Indonesia, the Philippines and Brunei. Meanwhile, the

CLMV bloc shares the same characteristics of rapid growth, but tends to be at

an earlier stage in its economic development.

Despite the collective categorization implicit in the grouping, ASEAN nations

are highly diverse. This diversity ranges from distinct ethnicities and cultures,

varied languages and religions, different stages of economic development and

stages of demographic cycles to a wide range of political governance.

However, when looked at collectively, the region’s long-term potential

becomes more apparent. If ASEAN were a single economy, it would be the

world’s seventh-largest today. With its dynamic demographics, rising labor

force and productivity-enhancing structural transformation, urbanization,

and increased regional integration, we believe there are significant opportuni-

ties in this space awaiting discovery by the entrepreneurial active investor.

September 2016

Sriyan PieterszInvestment StrategistMatthews Asia

2

ASEAN: Finding Growth in a Slowing Global Economy

Southeast Asia has made strong, if uneven, progress in the

nearly half century since ASEAN was founded, with the

region growing at an average annual pace of approximately

6% over the past decade. The region covers over 4.4

million square kilometers, more than half the size of the

continental United States.

Looking forward, ASEAN is poised to make further strides

by leveraging some key attributes: a population of over 630

million people (the third-largest population globally), a

potential market larger than the European Union or North

America, and a strategic location between Asia’s two economic

giants—India and China. As a foreign direct investment

(FDI)-driven manufacturing base second in scale globally only

to China, increasing intra-regional trade and global linkages

are fueling income growth. This, together with a young

population that is increasingly entering the workforce, and

migrating from rural areas to urban centers, makes ASEAN one

of the fastest-growing consumer markets in the world.

The region’s interconnectedness has taken another step

forward in 2016 with the inception of the ASEAN Economic

Community (AEC), which aims to promote freer movement

of goods, services, skilled labor and capital. Over time, this

should help the region leverage its natural advantages through

more connective infrastructure and improved opportunities

for its population and workforce, and by better harnessing

synergies among its 10 members. While the AEC will increase

regional integration over time, understanding the complexity

and the diversity of the region is critical to successful

investing, in our view. In the discussion, we highlight key

characteristics and long-term trends in ASEAN, and conclude

by illustrating the importance of active investing to try to

capture the region’s abundant potential growth opportunities.

ASEAN: HIGHLY DIVERSEThe standard deviation in average incomes among ASEAN

countries is more than seven times that of the E.U. members,

with the diversity extending to language, culture and

religion, according to McKinsey Global Institute (MGI). For

example, Singapore, a small island state of just 5.6 million

enjoys developed nation status with per capita income of

US$53,000, while Myanmar’s 54 million people who are

emerging from 50 years of isolation under military rule, have

per capita income of just US$1,200. Indonesia, formerly a

Dutch colony, is the largest Muslim nation in the world, with

a population of 258 million, while Thailand, where 95% of

the population is Buddhist, enjoys the distinction of never

having been colonized by outside powers.

To put the diverse stages of economic development into

context, it is interesting to look at where the 10 Southeast

Asian nations are distributed along China’s growth curve in

terms of per capita GDP. Figure 2 shows that Cambodia and

Myanmar, with per capita GDPs similar to China in 1994,

are the grouping’s least-developed members. Meanwhile, the

small city-states of Singapore and Brunei have “developed

nation” status with per capita GDP in the US$35,000 to

US$55,000 range.

Vietnam

Thailand

Cambodia

Malaysia

Philippines

Myanmar

Singapore

Laos

Indonesia

Brunei

FIGURE 1. THE 10-MEMBER NATIONS OF ASEAN

Source: ASEAN Secretariat

3


Politically, ASEAN runs the gamut from pluralistic democra-

cies to authoritarian states. The Philippines recently elected

Rodrigo Duterte, its first president from outside the nation’s

capital of Manila. Duterte hails from the tiny city of Davao

in Mindanao in the underdeveloped South—a testament to

the democratic process. Thailand, in contrast, is controlled

by a military government that took control in May 2014

in the country’s 12th bloodless coup d’état, while Vietnam

is under single-party Communist rule. In common with

China, however, all ASEAN countries have market-oriented

economic systems, with Myanmar the most recent entrant

to the club.

POLITICAL CHALLENGES

To be sure, internal political issues can pose long-term

challenges within ASEAN. In Vietnam, the Communist

Party’s single-party model remains the sole such example

in Southeast Asia, and the country’s solid economic growth

has helped to cushion dissent. But the young and well-ed-

ucated population is increasingly carving out greater civic

space, with activism against environmental issues, caused

by rapid industrialization, providing a platform for greater

political participation.

Elsewhere in the region, there have been simmering ethnic

and religious insurgencies and political rifts caused by

rising income inequality. Both the Philippines and Thailand

have been struggling with long-running, but slow-burning,

insurgencies in their southern regions. Islamist militant

groups in Mindanao have agitated for independent gover-

nance for decades, largely motivated by a lack of economic

opportunity. Despite President Duterte’s plans to enter into

dialogue with the rebels, he recently declared the country

under a “state of lawlessness” following a lethal explosion

at a night market in his home town. The tough-talking

president’s recent diplomatic row with U.S. President Barack

Obama and calls to abruptly depart from a U.S.-Philippine

military alliance exemplify the sort of unpredictable polit-

ical risks that can unnerve markets.

Thai politics have also been tumultuous for years, driven

largely by an underlying rift between its largely urban

middle class and more rural and populous areas to the

north, which have sought a greater share of political power.

The unrest involving ethnic Malay Muslim insurgency

calling for independence has smoldered in the south for

some time. The military government’s push toward a

“guided democracy,” starting with general elections sched-

uled for 2017, may provide some interim stability. In both

Thailand and the Philippines, government authorities are

seeking deeper political engagement with insurgents—a

move that may help to defuse tensions over time.

Geopolitically, as China flexes its muscle as an emerging

global power, it also poses a potential threat to stability and

unity of East Asia. It has demonstrated increasing assertive-

ness over maritime disputes with the Philippines, Vietnam,

Malaysia, Brunei and Indonesia in the South China Sea.

While China’s actions have increased tensions with ASEAN

states, it also raises the potential for heightened geopolitical

competition between China and the U.S. as the latter strives

to retain its traditional sphere of influence in East Asia.

DEMOGRAPHICS ARE ATTRACTIVE

Not only is the population of ASEAN the third-largest in

the world, it is also among the youngest (Figure 3). In 2015,

52% of the combined population was under the age of 30,

second only to India. Demographics will stay attractive over

the next 15 years, with the under-30 population expected

to ease modestly to 45% by 2030, according to the United

Nations Population Division, Department of Economic and

Social Affairs (UNPD). The importance of the region’s young

FIGURE 2. ASEAN IN THE CONTEXT OF CHINA’S GDP PER CAPITA EVOLUTION

Sources: International Monetary Fund, World Economic Outlook Database, April 2015

China’s GDP per capita

GDP per capita GDP (US$)

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

Dec-15Dec-05Dec-1995Dec-1985Dec-1980

Myanmar,Cambodia

LaosVietnam

Philippines

Indonesia

Thailand

MalaysiaSingapore, Brunei

FIGURE 3. PROPORTION OF POPULATION UNDER AGE 30

Source: United Nations Department of Economic and Social Affairs, Population Division, 2015

2015 2030 estimate

0%

10%

20%

30%

40%

50%

60%

JapanEuropeU.S.ChinaASEANIndia

4


population is that steady growth of the workforce can be

expected, with UNPD estimating stable annual workforce

growth of 0.9% from 2015 to 2030. This compares to China,

Europe and Japan, where the working populations are

projected to contract annually by -0.3%, -0.6%, and -0.7%,

respectively, during the same period.

Within ASEAN, the disparity in population age is wide

(Figure 4). Broadly, the more developed ASEAN countries

are more aged. Singapore is most senior with a median age

of 40, followed by Thailand at 38. The CLMV block ranges

from Vietnam’s 30.4 year median age to Laos’ dewy 22,

pointing to years of potentially strong growth ahead as the

earning power of these young populations is realized. The

labor engine that is CLMV can also help to power the more

FIGURE 5. FOREIGN DIRECT INVESTMENT INFLOWS INTO ASEANValue (US$ million) Share to total inflows (%)

Country or region1 20133 2014 2015* 20133 2014 2015*

ASEAN 19,562.2 22,134.5 22,149.0 15.7% 17.0% 18.5%

European Union (E.U.) 24,511.3 24,989.9 19,666.5 19.6% 19.2% 16.4%

Japan 24,750.2 15,705.4 17,395.2 19.8% 12.1% 14.5%

U.S. 7,157.2 14,748.5 12,191.5 5.7% 11.3% 10.2%

China 6,426.2 6,990.1 8,155.3 5.1% 5.4% 6.8%

South Korea 4,303.3 5,750.7 5,680.2 3.4% 4.4% 4.7%

Australia 2,587.7 6,281.5 5,193.0 2.1% 4.8% 4.3%

Hong Kong 5,251.2 9,813.2 3,621.1 4.2% 7.5% 3.0%

Taiwan 1,381.8 3,253.9 2,646.4 1.1% 2.5% 2.2%

New Zealand 335.9 550.0 2,241.1 0.3% 0.4% 1.9 %

Total Top 10 sources 96,267.1 110,217.7 98,939.3 77.1% 84.8% 82.5%

Others2 28,597.4 19,777.4 21,035.5 22.9% 15.2% 17.5%

Total FDI Inflow to ASEAN 124,864.5 129,995.1 119,974.8 100.0% 100.0% 100.0%

* Preliminary estimates Details may not add up to totals due to rounding off. 1 Ranked according to FDI inflows in 2015; covers countries for which data is available. 2 Include inflows from all other countries, as well as total reinvested earnings and debt instruments in the Philippines. 3 Lao PDR’s data on “by source country” for 2013 is not available, intra-/extra-ASEAN breakdown shown are estimated.Source: ASEAN Foreign Direct Investment Statistics Database as of 30 June 2016 (Data is compiled from submission of ASEAN Central Banks and National Statistical Offices through the ASEAN Working Group on International Investment Statistics (WGIIS).

aged countries in ASEAN, particularly Thailand, which

shares borders with Cambodia, Myanmar and Laos.

FDI AND TRADE ARE IMPORTANT GROWTH DRIVERS

Trade has been a consistently important driver of economic

growth, with its linkages to the manufacturing sector and

domestic employment helping to kick-start income and

consumption activity. This has in turn been sparked by

strong foreign direct investment flows attracted by advanta-

geous labor cost differentials and a motivated and trainable

workforce. The shift of agricultural labor, which comprises

about 40% of the ASEAN workforce (in comparison to

less than 10% in developed countries), into more skilled

manufacturing tasks is creating productivity gains that are

driving income growth.

ASEAN’s share of global FDI surged to 11% in 2014, from under

2% in 2000. In recent years, ASEAN itself has become the

top investor in the region, contributing an estimated US$22.1

billion (18.5%) of total FDI in ASEAN in 2015. The next three

biggest investors were the European Union (16.4% of total

FDI), Japan (14.5%), and the U.S. (10.2%). China’s investment

in ASEAN has become more dynamic, growing from US$6.4

billion in 2013 to US$8.2 billion in 2015 (Figure 5).

Japan has played a vital role in ASEAN FDI, with the Japan

Bank for International Cooperation (JBIC) spearheading

ASEAN infrastructure investment over the last decade. As of

fiscal 2014–15, the bank had ¥1.6 trillion in assets and equity

across 343 projects in ASEAN, over 11% of its balance sheet

FIGURE 4. MEDIAN AGE OF ASEAN POPULATION

Source: United Nations Department of Economic and Social Affairs, Population Division, 2015

ASEAN nations

LaosCambodiaPhilippinesIndiaMyanmarIndonesiaMalaysiaVietnamChinaThailandSingaporeSouth KoreaHong KongJapan 46.5

43.2

40.6

40.0

38.0

37.0

30.4

28.5

27.9

26.6

24.2

23.9

28.4

21.9

5


(Indonesia received nearly 50% of the total), according to the

Financial Times (FT). These investments create a virtuous

circle, with better infrastructure helping to draw in addi-

tional investment from Japanese corporates, especially in the

least developed parts of ASEAN.

Today, ASEAN accounts for 7% of global exports, with a

well-diversified export base (Figure 6). The more open econ-

omies of Singapore, Malaysia, Thailand and Vietnam, where

exports have a greater than 70% share of GDP, are focused

primarily on higher value manufactured exports, while

the more domestically oriented Philippines and Indonesia

export a larger proportion of commodities, both agricultural

and mineral.

ASEAN is increasingly the heir to China as a global export

base, as documented in the flow of FDI (Figure 7). Since 2002,

when FDI into ASEAN was US$17 billion and accounted

for just 32% of flows into China, FDI has surged to US$126

billion in 2015, 93% that of China, according to the United

Nations Conference on Trade and Development (UNCTAD).

Formerly a key competitor, China is turning into a customer

for ASEAN. Following the ratification of the ASEAN-China

Free Trade Area agreement in 2002, ASEAN-China bilateral

trade has soared. From 9.1% of the value of total ASEAN

trade in 2003, bilateral trade jumped to 19.1% in 2014,

according to the Economist Intelligence Unit (EIU).

China has been ASEAN’s biggest trading partner for the past

seven years, with trade value on track to total US$1 trillion

by 2020.

An interesting development is the rapid growth in services

exports to China, predominantly through tourism. ASEAN

complements an emerging Chinese middle class; as China’s

middle class consumers increase their expenditure on leisure,

the impact on recipients of tourism flows has been nothing

short of transformational (Figure 8). Thailand is a case in

point: Chinese arrivals to Thailand have increased ten-fold

in six years from 2009–2015, pushing direct tourism income

from 6.2% of GDP to nearly 8% of GDP and providing vital

support to a slowing domestic economy.

Looking forward, ASEAN remains well-positioned to benefit

from an eventual recovery in global demand. Participation

in free trade agreements such as the Trans-Pacific Partner-

ship (TPP) and the Regional Comprehensive Economic

Partnership (RCEP) are already drawing in new FDI aimed

at increasing backward integration to comply with more

stringent rules of product origin. This will deepen ASEAN’s

linkages with the global supply chain and make its competi-

tive position as a manufacturer for the world more durable.

It must be noted that much of the region’s growth to date

has been driven by increasing factor inputs (more people

entering the workforce and investment in capital stock) and

by transformational benefits of shifting from low produc-

tivity agricultural work to higher productivity manufacturing

and services. Overall productivity levels remain low, and

5.4%

5.8%

6.2%

6.6%

7.0%

7.4%

0%

2%

4%

6%

8%

10%

12%

2000 2002 2004 2006 2008 2010 2012 2014

FIGURE 6. ASEAN’S SHARE OF GLOBAL EXPORTS AND FDI

Source: UNCTAD

ASEAN share of global FDI (LHS) ASEAN share of global exports (RHS)

FIGURE 7. ASEAN VS. CHINA FDI

Source: UNCTAD

China FDI ASEAN FDI

0

20

40

60

80

100

120

140

160

1990 1995 2000 2005 2010 2015

US$ Billion

FIGURE 8. CHINESE TOURIST ARRIVALS IN THAILAND

Source: Thailand Department of Tourism

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

20152010200520001997

Thousands

6


the region’s challenge is to raise output per worker levels to

continue to attract new FDI flows and sustain income growth.

The recent trend of “near-shoring” or relocation of manufac-

turing back to source countries is a potential threat to lower

value-added producers in ASEAN. We believe that domestic

markets with adequate scale may be able to avoid the loss

of export manufacturing. Only time will tell, but ASEAN’s

strategic location next to China and India (making up a 3.3

billion-strong market) and resulting low distribution/logis-

tics costs may outweigh the cost savings of automating/near-

shoring manufacturing plants back to the developed market

locations of multinational manufacturers.

“BOOTSTRAPPING” ASEAN— RISING INTRA-REGIONAL GROWTH POTENTIAL

Amid concerns over sluggish external growth trends, ASEAN

offers strong potential for regionally generated growth. The

inception of the ASEAN Economic Community (AEC) this

year will further ease barriers to intra-regional trade, invest-

ment and employment, while concerted fiscal spending on

infrastructure will have significant medium-term benefits

for the region.

Intra-ASEAN trade has been more resilient against a recent

trend of weaker trade (Figure 9). Since 2003, about 25% of

the region’s exports have gone to other ASEAN partners.

Thailand is now eyeing its CLMV neighbors to help offset

shrinking shipments to key market destinations, aiming to

boost exports to these markets by nearly 14% this year. Thai

exports to the CLMV bloc currently account for over 10% of

the country’s total, underlining their importance as trading

partners. The Thai Commerce Ministry predicts that Thai

exports to CLMV will reach US$25.3 billion this year.

Similarly, intra-ASEAN investment has grown as a share

of FDI into ASEAN as more mature economies such as

Singapore, Thailand, and Malaysia seek to leverage their

faster-growing neighbors (Figure 10). Intra-regional FDI,

coming mainly from the more developed ASEAN-6,

comprised an average 17% of total FDI flows between

2008 and 2014 as against an average of 13% from 2001-07,

according to the ASEAN secretariat.

Intra-ASEAN employment mobility, although officially

restricted to eight professions under the AEC, already offers

a growth pathway for less-developed ASEAN countries via

overseas worker remittances, both official and unofficial.

The contributions are non-trivial, with remittances having

increased household income in Cambodia and Laos by 59%

to 120%, according to a 2010 International Labor Organiza-

tion study by Deelen and Vasuprasat. The economic benefits

are not a one-way street: countries with older demographic

profiles such as Singapore and Thailand are manning

construction, fishing and increasingly manufacturing indus-

tries with the influx of young and lower cost labor from

Myanmar and Cambodia, in particular.

URBANIZATION AND THE RISE OF A CONSUMER CLASS

ASEAN’s population is still largely rural. Farming/

agriculture accounts for a significant portion of labor force

employment, with the exception of the highly developed

city-states of Singapore and Brunei. As FDI drives increasing

manufacturing for both export and domestic markets,

more and more workers are recruited away from low value-

added agricultural work to higher value manufacturing and

assembly jobs.

FIGURE 9. ASEAN TRADE STATISTICS


Total trade

0

500

1,000

1,500

2,000

2,500

3,000

20152010200520001993

US$ BillionBeginning of AFTA(ASEAN Free Trade Agreement)

Beginning of ATIGA(ASEAN Trade in Goods Agreement)

Extra-ASEAN

Intra-ASEAN

FIGURE 10. INTRA-ASEAN NET FDI INFLOWS


US$ Million

0%

5%

10%

15%

20%

25%

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Intra ASEAN net FDI in�ow (LHS) % of net total FDI in�ow into ASEAN (RHS)

$0

$10,000

$5,000

$15,000

$20,000

$25,000

7


This structural transition from primary sources of activity

to secondary manufacturing and tertiary services activities

is a key driver of productivity in ASEAN, helping to

boost incomes and raise large proportions of the regional

population up the income ladder. As they move to factories,

urbanization rates rise, creating agglomerations of people

and network effects that reinforce consumption activity,

and in turn generate more job and income opportunities.

In ASEAN, the urbanization rate is expected to grow 5.3

percentage points in the next decade (vs 3.7 percentage

points for the global average), according to the UNPD

(Figure 11).

Currently, there are 235 cities spread across ASEAN with

populations greater than 200,000. Just over one-third of

the ASEAN population lives in these cities, which generate

two-thirds of the region’s GDP, according to MGI. MGI

expects that over 90 million more people could migrate

to these cities by 2030, taking their GDP share to three-

fourths of the ASEAN total.

With the increasing trend of urbanization, ASEAN has a

large and rising base of new consumers. Rising productivity

and wages are creating a growing consumer class that

demands discretionary purchases, from washing machines

and cars to leisure activities and travel. The number of

households at or above the middle income threshold of

over US$7,500 (in 2005 PPP terms), where discretionary

consumption begins to rise, could double to 163 million in

2030, driven by Indonesia, according to MGI (Figure 12).

This emerging consumer class will galvanize demand for a

wide range of goods and services. Penetration rates are low

for consumer durables and discretionary services such as

health care, and can be expected to follow the trajectory

of more developed economies as per capita incomes rise

(Figure 13).

The housing requirements generated by this massive wave

of urbanization are large. ASEAN needs an estimated

US$3.1 trillion in residential housing development over

the next two decades with over half of it concentrated in

Indonesia and the Philippines, according to MGI.

The deepening penetration of technology in ASEAN, helped

by the young and technologically savvy demographic profile,

FIGURE 11. URBANIZATION RATE AND GROWTH

Source: United Nations

2% 4% 6% 8% 10% 12%20%

40%

60%

80%

100%Northeast Asia

Australasia

U.S. and Canada

Latin AmericaWestern Europe

Global average

Eastern andCentral Europe

Middle East andNorth Africa

China

Southeast Asia

Sub-Saharan Africa

South Asia

Urbanization Rate (2015)

% of Incremental Urbanization Expansion in the Next Decade

FIGURE 13. ASEAN HEALTH CARE EXPENDITURE

Source: World Bank, data as of 2014

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,5000%

2%

4%

6%

8%

10%

12%

Costa Rica

BrazilNew Zealand

Korea

South Africa

Japan

Singapore

UAE

Qatar

Health Care Expenditure as % of GDP

Health Care Expenditure as Per Capita

U.K.

Kuwait

Cambodia

MexicoTurkey

Average EM

VietnamChina

Thailand

PhilippinesMalaysia

IndonesiaLaos

Myanmar

SaudiArabia

Oman

FIGURE 12. ASEAN CONSUMING CLASS HOUSEHOLDS, 2013–2030*

*De�ned as households with more than US$7,500 in annual income (in 2005 purchasing power parity terms).This is the income level at which households begin to make signi�cant discretionary purchases.

Source: McKinsey Global Institute

2013 2030 estimate

0 45 90 135 180

Laos

Singapore

Cambodia

Malaysia

Myanmar

Thailand

Vietnam

Philippines

Indonesia

ASEAN 81

163

3474

1123

1021

203

9

6

13

9

13

12

11

Millions

8


is also facilitating growth of consumption (Figure 14). Factors

such as improved telecom coverage, deeper smartphone

and internet penetration, as well as low penetration rates for

big-box retailers who experience access difficulties due to the

archipelagic geography of Indonesia and the Philippines, are

likely to accelerate ASEAN e-commerce trends even in advance

of increased urban concentrations.

Southeast Asia is the world’s fastest-growing online market,

with internet usage growing at a compounded annual

growth rate of around 14% over the past five years. The

established user base of 260 million in ASEAN-6 is forecast

to grow to 480 million by 2020 with 3.8 million users

added every month, according to a recent report issued by

Google and Temasek. Social media has also gained wide

acceptance, with 36% of adults across ASEAN having a

Facebook account. E-commerce and mobile commerce are

also set to follow the broader Asian trend, with the poten-

tial to turbocharge consumption patterns among ASEAN’s

emerging spenders. For example, more than 8% of all retail

sales in China are now made online, and are forecast to

double to 16% by 2018, according to the EIU.

The first-hand e-commerce market is thus expected to

reach about US$88 billion in value by 2025, significantly

outgrowing off-line retail (32% vs. 7% 10-year CAGR).

Just as the number of China’s outbound tourists has grown

exponentially in recent years, overall, ASEAN’s market for

leisure is also rising with its disposable income. Nowhere is

this more evident than in the newfound taste for air travel.

As a combined region, ASEAN’s international tourist arrivals

grew at the fastest pace in the world over the past decade,

generating US$108 billion in receipts in 2015.

And much of this expenditure stays within the region—47%

of arrivals in ASEAN were from other ASEAN countries in

2014, according to the ASEAN Secretariat.

STRATEGIC LOCATION

While ASEAN offers a large captive domestic market

to its own members, its strategic geographical location

allows access to two even larger markets with a combined

population of nearly 2.7 billion: China to the northeast

and India to the west.

ASEAN’s linkages with China are deep, with exports to

China comprising a significant share of GDP, from 13.8%

in Singapore to 8.2% in Malaysia (Figure 15). As China’s

economic structure evolves to a more domestically driven

model, imports from ASEAN will likely fall. However, this

is now being compensated by increased exports of services

from ASEAN to China, coming mainly in the form of rising

tourism flows.

India remains a largely untapped market to date for

ASEAN, but as India’s per capita income ramps up, import

demand is likely to rise following China’s prior trajectory

(Figure 16). ASEAN is well-placed to supply this market,

given common borders to the west of Myanmar.

FIGURE 15. ASEAN: EXPORTS TO CHINA BY CATEGORY

Source: CEIC, June 2016Commodities Manufacturing

0%

2%

4%

6%

8%

10%

PhilippinesIndonesiaMalaysiaThailandSingapore

% GDP

FIGURE 14. ASEAN MOBILE COMMERCE

Source: consumerbarometer.com, as of August 23, 2016

20% 40% 60% 80% 100%10%

20%

30%

40%

50%

60%

70%

80%

90%

Thailand

Singapore

South KoreaMalaysia

Taiwan

Philippines

Vietnam

Japan

Australia

U.S.

India

Indonesia

Smartphone Penetration Rate

China

Hong KongU.K.

Consumers Who Researched or Made Purchases Via Smartphone

9


In this context, infrastructure and logistical linkages are

critical. ASEAN as a whole needs to invest an estimated

US$110 billion per year in infrastructure by 2025,

especially for roads and railways, according to UNCTAD.

At present, ASEAN countries have a combined average of

10 kilometers of roads per 1,000 persons, compared to the

OECD countries’ 200 km, while railways average about

0.25 km per 1,000 people in ASEAN compared to the

OECD’s 5 km.

To address these deficits, key land, water, maritime and

air linking infrastructure plans are being implemented

under the ASEAN Economic Community integration.

With a length of 38,400 km and 23 designated routes, the

ASEAN Highway Network (AHN) will play a major role in

facilitating the movement of goods among ASEAN member

states and neighboring countries, according to the ASEAN

Secretariat’s Master Plan on ASEAN Connectivity.

A second ambitious project, aimed at linking ASEAN to

China in the North and East, is the Singapore-Kunming

Rail Link (SKRL). The SKRL consists of a main Singa-

pore-Malaysia-Thailand-Cambodia-Vietnam-Kunming

route, with spurs between Thailand and Myanmar and

Thailand and Laos. In all, the rail route would run a stag-

gering 7,000 km, with a potential future spur extension to

Surabaya in Java via Singapore or Malaysia.

Maritime infrastructure is also important, as a large part

of ASEAN is archipelagic (Indonesia and the Philippines),

and sits astride a major global transshipment route in the

Straits of Malacca. Forty seven new ports are designated to

improve shipping services across the region by 2030, with

only Singapore and Malaysia currently at full developed

status, according to the Japanese International Cooper-

ation Agency (JICA). The improvement of the maritime

network will add further nodes to intra-ASEAN and inter-

ASEAN trade flows, while reducing transportation costs to

provide ASEAN with significant cost advantages in a highly

competitive global trade arena.

ASEAN IS NOT THE E.U.

Following the recent decision of Britain to leave the Euro-

pean Union and with other potential exits hanging in the

balance, questions may be raised about the future of ASEAN.

It is important to note the differences between the E.U.

and ASEAN in degree of integration. In a regional union

continuum that can be defined in five stages such as a free-

trade market; a common market; standardization of customs

regulations; a common currency; and supranational union

covering all aspects of integration, ASEAN is still at second

base while the E.U. has progressed well into the fourth stage.

ASEAN does not incorporate currency union, nor does it

yet allow free labor mobility across borders. The former

has never been envisaged, given that the more developed

ASEAN nations have highly open economies and would

not consider relinquishing control of their respective

currencies, not to mention that the single currency has

proven to be the source of many of the E.U.’s problems.

The latter, which entails free migration across the E.U., was

perhaps the most influential point in the Brexit decision.

The AEC, in contrast, facilitates freer movement of only

eight professions: engineers, nurses, architects, surveyors,

accountants, medical practitioners, dentists and tourism

professionals. Even so, the cross-border movement in

these eight areas has been constrained by professional

certification standards that have yet to be aligned across

countries. Thailand, for instance, requires outside doctors

to be locally certified before being allowed to treat patients.

Given the ASEAN member countries’ varied histories and

strong sense of individual sovereignty, regional “harmo-

nization” rather than full integration may prove to be the

long-term result. Such nuanced integration may be more

durable and less subject to internal stresses, in our view.

Despite its more nuanced approach, the AEC has generated

benefits for the region as a whole. Prior tariff cuts and

market integration that have come with the AEC stage

have helped to highlight the potential of the region’s over

630 million-strong market to direct investors, drawing in

fresh flows of FDI that continue to increase employment,

upgrade technology, boost productivity, and deepen

ASEAN’s integration with global supply chains.

FIGURE 16. ASEAN TRADE WITH CHINA AND INDIA

Source: ASEAN SecretariatASEAN-China trade % of intra-ASEAN trade ASEAN-India trade % of intra-ASEAN trade

25%

50%

75%

20152013201120092007200520032001

10


RISKS AND OPPORTUNITIES

Earlier in this commentary, we discussed the risks that

can come with unexpected political and geopolitical

developments. Here, we outline some other potential risk

factors that we are often asked about, including slowing

growth from China.

While ASEAN countries have benefited from China’s

strong and sustained investment-driven growth model

in recent decades, China’s economic rebalancing toward

a consumption-driven model may have spillover effects

that affect ASEAN. Key transmission channels of China’s

slowdown are trade, commodities and financial markets,

although the latter is most significant for Singapore,

a regional financial center. Trade in investment-

related goods and intermediate components as well as

commodities represent the bulk of ASEAN’s exposure

to China. Exports to China, as a proportion of GDP,

vary substantially across the region, given differences

in “openness to trade,” from 17% of GDP for Singapore

to just 2% for Indonesia. Net commodity exporters in

ASEAN, such as Indonesia and Malaysia, have been

negatively affected as prices and volumes have fallen

on lower demand from China. Even net commodity

importers, such as Thailand, have some exposure to

commodity price shocks due to a large agricultural sector

and high farming industry employment.

That said, there are also opportunities for ASEAN in

China’s growth rebalancing, as imports shift away from

investment and toward consumption goods. A recent

paper from the IMF finds that ASEAN economies are

gaining market share in China’s consumption imports,

which could grow over time to supplant former industrial

export losses. Further, the rise of the Chinese middle class

is driving increasing demand for services and growth in

travel and leisure trends.

DEALING WITH DISASTER

Geographically, ASEAN is considered to be one of the more

disaster-prone regions in the world—situated along an area

known for its tectonic activity called the “Ring of Fire” that

is subject to earthquakes, tsunamis and volcanic eruptions.

It is also located between the Pacific and Indian oceans,

giving rise to convection effects that cause seasonal tropical

cyclones and intermittent drought and flood cycles. Natural

disasters often surpass the ability of individual countries to

manage them, such as in the case of the 2004 Indian Ocean

tsunami that decimated the region following an underwater

earthquake off the coast of Indonesia. ASEAN’s collective

efforts to manage this risk led to a legally binding regional

agreement to collaborate over disaster risk management and

emergency response.

Climate change is also a significant concern for ASEAN,

given its large agricultural population (about 40% of

ASEAN’s labor force is tied to the agricultural sector).

More frequent drought and flood cycles have wide-

ranging impacts as lower agricultural output translates

into weaker incomes and higher food inflation. While this

has been a persistent drag on economic activity in the

region, the rise of FDI-driven manufacturing is driving

increasing migration into secondary and tertiary sectors,

allowing rural households to cushion income sources,

while pushing increased productivity in the agriculture

sector over time.

INVESTING IN ASEAN

This commentary has attempted to shed some light

on Southeast Asia as a region, highlighting both its

individual differences and collective strengths. We

believe that the region’s demographics, in the form of

its large combined population of over 630 million, of

whom nearly 50% are below the age of 30, form the

base for a dynamic growth story. FDI continues to be

attracted by the availability of abundant and low cost

labor, driving the shift of labor from low productivity

pursuits to more productive manufacturing and services

activities. Productivity gains are multiplied by the scale

and network effects of increasing urbanization, leading

to income growth. As the proportion of the population

reaching middle income levels increases, consumption

expands. Participation in global and super-regional trade

partnerships such as the TPP and RCEP will enhance

the region’s attractiveness and make it more durable,

buying time to generate the productivity gains that are

necessary to sustain future income growth. Investment

in connectivity across the region is leading to increased

synergies, and will make the region less vulnerable to

external demand swings over time.

But how does one invest in this resilient growth story?

While our discussion has included all of ASEAN, only six

of the countries have investible stock markets, namely

Singapore, Thailand, Indonesia, Malaysia, the Philippines

and Vietnam. Among them, Singapore is listed with

developed markets, and nearly two-thirds of its listed

company revenues are derived from the rest of ASEAN.

Consequently, the five emerging ASEAN markets are of

greatest interest to growth-seeking equity investors, in

11


FIGURE 18. LISTED STOCKS GROUPED BY MARKET CAP

Source: Bloomberg, data as of July 2016

Thailand

Indonesia

Malaysia

Philippines

Singapore

Vietnam

Laos

Cambodia

0% 25% 50% 75% 100% >$5bn $500mn–$5bn $100–500mn <$100mn

FIGURE 17. NUMBER OF LISTED STOCKS IN ASEAN

Source: Bloomberg, data as of July 2016

Cambodia

Laos

Philippines

Indonesia

Thailand

Singapore

Malaysia

Vietnam 1,004

929

767

726

539

264

5

4

our view. Nascent stock markets in Laos, Cambodia and

Myanmar lack institutional capacity and governance

structures, and may be best accessed via regional listings,

particularly in Thailand’s SET index, which is gearing up as

a gateway to Indochina.

The difficulties facing equity investors in the region can

be illustrated by a few interesting numbers. In all of the

accessible ASEAN markets, there are a total of 4,238 listed

company stocks (Figure 17). The MSCI individual country

index universe based on free float market capitalization

eligibility requirements features less than 4% of this total,

or just 167 companies. Screening for market capitalization

alone, using US$5 billion as a lower bound, yields just 92

companies (Figure 18). Below this, screening a further layer

of companies with market capitalization above US$500

million yields a further 693 stocks. But the majority of the

listed company universe, 2,608 stocks (62% of the total

listed ASEAN universe), lies in the sub-US$100 million

range and is poorly covered by the analyst community.

Consequently, we believe there are significant opportuni-

ties in this space awaiting discovery by the entrepreneurial

investor who is willing and able to perform on-the-ground

due diligence.

To sum up, we believe successful investing in Asia requires an

increased focus on regional growth and domestic demand.

Nowhere is this more likely to be accessed than in ASEAN,

powered by its dynamic demographics, rising workforce

entrants and productivity-enhancing structural transforma-

tion, urbanization and increased regional integration.

The views and information discussed are as of the date of publication, are subject to change and may not reflect the writer’s current

views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not

be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a

recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and

emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a

high level of volatility and limited regulation. These risks are magnified in frontier markets. Many Asian countries are considered

emerging or frontier markets. Such markets are often less stable politically and economically than developed markets, and investing

in these markets involves different and greater risks. There may be less publicly available information about companies in many Asian

countries, and the stock exchanges and brokerage industries in many Asian countries typically do not have the level of government

oversight as do those in developed countries. Securities markets of many Asian countries are also substantially smaller, less liquid and

more volatile than securities markets in developed countries. Past performance is no guarantee of future results. The subject matter

contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation, but no

representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews

International Capital Management, LLC (“Matthews Asia”) does not accept any liability for losses either direct or consequential caused

by the use of this information.©2016 Matthews International Capital Management, LLC VA013

slowing global economy - matthews asia · space, with activism against environmental issues, caused...

Documents