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By Emerald Yau, Head of Equity Index Product Management Asia and Miko Huang, Manager, Equity Index Product Management Asia
Resilient growth despite a challenging environment globally
Against the challenging environment and increasingly dimming economy globally in 2022 – from a slowing China economy in the east to a very hawkish Fed in the west, to geopolitical tensions from Ukraine to Asia – Southeast Asian countries represent a rare part of the world that have delivered impressive resilience.
These countries – sometimes together known as the ASEAN region – have reopened post-Covid. Growth normalized or even rebounded strongly. The International Monetary Fund (IMF) projects that the ASEAN economy will grow 5.6% in 2022 and 6% in 2023, outpacing the projected growth of global GDP (3.2% and 2.9% in 2022 and 2023 respectively). ASEAN equities together is increasingly emerging as a distinct asset class.
The ASEAN region consists of a diverse group of Southeast Asian countries benefiting from various growth drivers. Vietnam, gaining from the global supply chain diversification and transforming into another manufacturing powerhouse, is the best performing economy in Asia in 2022, expecting a 7% growth in 2022. The Philippines is forecast to see a 6.5% expansion this year, helped by factors like tourism recovery and infrastructure spending. Indonesia and Malaysia benefited from strong commodity prices earlier this year and are expected to see growth topping 5%. Thailand is expected to grow faster next year, driven by a pickup in the vital tourism sector after reopening.
Favorable structural tailwinds, such as supply chain relocation, favorable demographics, and supportive policy to invest in infrastructure are all helping ASEAN propel forward. Foreign direct investment (FDI) inflows into ASEAN continue to be an engine of growth. FDI into the six largest ASEAN economies – Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam – rose to $168 billion in 2021, the pre-pandemic record. Singapore is the largest FDI recipient. Vietnam also receives strong technology manufacturing-related inflows as major multinationals like Samsung (OTCPK:SSNLF) are building and expanding their presence in the country.
Complementary mix of opportunities
The FTSE ASEAN Index, an index under the FTSE Global Equity Index Series and comprises of large- and mid-cap companies listed in the original five ASEAN countries, reflects the unique opportunities presented by each economy.
Being at different stages in terms of their economic advancement, these countries tend to offer complementary rather than competing opportunities. For example, Singapore is home to dominating regional banks and dividend-generating REITs. Thailand houses a few large energy and utility companies, including a few focusing on renewable energy. Indonesia and Malaysia see more consumer companies, particularly related to auto, food producers, and palm oil businesses. Meanwhile, the Philippines offers a more even opportunity set across industries.
Overall, the Financials and Real Estate industries display a heavy weight of almost 50% in the FTSE ASEAN Index as of 30 November 2022, with the largest five constituents in the index being top banks from Singapore and Indonesia.
The heavier exposure to value-driven sectors also leads the FTSE ASEAN Index to deliver a relatively higher yield than the broader global markets. In the past decade, the dividend yield of the index has hovered between 3% to 4%.
Meanwhile, Vietnam remains a Frontier country as per the FTSE Equity Country Classification. The relocation of multinational supply chains and strong FDI inflows have lifted consumption and real estate demand in Vietnam. These two areas see the most exposure (61.2% in terms of weighting as of 30 November 2022) in the FTSE Frontier Large Mid Cap Vietnam Index, which measures the performance of large and mid-cap companies traded in Vietnam.
A relative bright spot post-Covid
This year has been characterized by rising geopolitical tensions, higher inflation and monetary tightening around the world. While many markets are suffering a double-digit decline year-to-date, the FTSE ASEAN Index earns a positive return of 2% in US dollar terms with the support of reopening post-Covid, the positive projected growth of GDP and the resilient FDI. Over a longer-term horizon, at the time of writing, the FTSE ASEAN Index delivered comparable return and volatility, compared to the benchmark indices of APAC, emerging and China A-share.
Not without risk, but a rising asset class in Asia
ASEAN has emerged as a vibrant asset class, with a basket of countries complementary to one another given them being in different stages within the lifecycle. While the value and cyclical industries like financials, real estate and telecommunications currently dominate in ASEAN, these countries are now diversifying their economies with a push into innovation, such as technology, digitalization and e-commerce.
Just like any investment decision-making, investing in ASEAN would also require thorough studies by investors. Rising inflation pressure, tighter financial conditions, potentially weaker global demand under a recessionary scenario, and impact on exports are some of the challenges that investors should be aware of.
That said, the combination of tradition and innovative business development lifts the potential for ASEAN to become an economic force to be reckoned with in the world. This overlooked gem in Asia has shone in 2022.
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