Investing in Southeast Asia

05/05/2014 10:00 am EST

Focus: ETFs

Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Global expert Carl Delfeld has just returned from an investment tour through southeast Asia. Here, the editor of the Capital Gains Letterhighlights the best stock, fund, and ETF ideas for investors seeking exposure to this fast-growing region.

Steven Halpern: Joining us today is global investing expert, Carl Delfeld of the Pacific Economic Club and editor of the Capital Gains Letter. How are you doing, Carl?

Carl Delfeld: I’m fine, thank you. Good to be with you.

Steven Halpern: Well, thank you for joining us. You’ve just returned from an investment tour through Southeast Asia. I also just returned from there and would be particularly interested in your thoughts on the investment potential of the region.

Carl Delfeld: Well, Steven, when people think of Asia investors, they normally only think about China and the way we would frame it is, the Southeast Asia—the ten countries that makeup Southeast Asia—are an even better opportunity for investors.

You know, the combined population of about 620 million people, they’re very young, there’s a rising middle class that’s spending money and, in addition to that, they’ve really had great growth.

Over the last ten years, they’ve grown 170%, in terms of their economies, and one other key attraction is, China’s wages have been going up, and up, and up, the Philippines and Indonesia have manufacturing wages about a third of China and in Vietnam, it’s about half.

Steven Halpern: Now, President Obama has been reaching out to Southeast Asia. How do you view the geopolitics in this region impacting the long-term investment climate?

Carl Delfeld: Well, the way I look at it, Southeast Asia, Asia in general, is both the sweet spot and the cockpit for the next couple of decades and which way it will go will be very interesting and very important, but the geopolitics of this is that, the United States, Japan, South Korea, China, and the Southeast Asian countries are all jockeying for a position.

They all want to grow. They all want a peaceful pacific century and they all want an advantage economically, and so, that’s what you see happening. I’ll give you one example: Japan, of course, and the US have an alliance and that’s where President Obama is now and then he’s headed to Southeast Asia.

But I’ll give you one very head scratching fact, and that is, that last year, Japanese investment in Southeast Asia doubled in one year and their investment—Japanese companies' investment in Southeast Asia—was three times larger than new investments in China, so you see what’s going on. Japan is pulling back a little bit from China and spreading its bets.

Steven Halpern: Well, in line with what you’re describing there, the BRIC countries, such as China, and even India, have seen their markets decline in recent years, while the Southeast Asian markets have generally been up. Do you expect this outperformance to continue in the years ahead?

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Carl Delfeld: Well, it’s hard to say. I mean BRIC, Brazil, Russia, India, and China, of course, are all different countries, but you’re absolutely right that the BRIC markets, as a whole, surprisingly, have been down over the last year, the last two years, and even the last five years, but that’s all that advisors and the financial media have been talking about.

Meanwhile, Southeast Asia—every one of the countries in Southeast Asia has been up over those—all those three time periods, with one exception, so obviously, your money would have been a lot better in Southeast Asia.

What’s going to happen, going forward, is hard to say, but I would bet that Southeast Asia will continue to outperform China, Russia, India, and Brazil, as well.

Steven Halpern: Well, let’s look at a few specific markets.

Carl Delfeld: Sure.

Steven Halpern: You’ve called Singapore, the Switzerland of Asia. Can you tell us about this market and your outlook there?

Carl Delfeld: Sure, well Singapore, of course, is a very well developed market and it’s a great place for listeners to start with. I mean, there’s an ETF—iShares MSCI Singapore (EWS)—which is a basket of the bluest blue chips in Singapore. You’re not going to make a million dollars in the Singapore ETF, but it’s a good place to start.

You know, Singapore is—believe it or not—only one fifth the size of Rhode Island, but it’s one of the most open, the most thriving economies in the world. Trade is very important to it.

Its geographic position—on the Straits of Malacca, where 80% of the oil that goes to China and Japan passes through—so it’s, absolutely, a perfect location and it’s got a triple A credit rating.

There’s only seven countries in the world that have a Triple A credit rating, you know, the United States lost it a year or so ago, so, I think, it’s a great proxy for Southeast Asia, and it’s the financial capital of Southeast Asia, and there’s some really good companies based in Singapore that are growing with the region.

Steven Halpern: Now, in looking at particular companies, one that you’ve been recommending is a blue chip called Keppel (KPELY). Can you tell us the story there?

Carl Delfeld: Sure, sure. Keppel is, very much, a leading company in Southeast Asia and in Singapore. It’s a conglomerate. There’s three parts of it, all of which, I think, are really positive.

One is, it’s a maritime ship building company and then its in maritime energy and they specialize in these offshore deep, deep water offshore rigs. They’re very high tech, very expensive, with very good margins, and they just don’t work in Singapore or even in the region.

For example, they’re doing a lot of work in Brazil and a lot of different areas in the world, so, it’s a great global company, and then, it’s got a property side of it and property has done well in the region and then infrastructure and everybody knows that that’s one of the main things a lot of these emerging market countries need is new infrastructure.

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It’s been trading between $16 and $20 for a while. It’s down at the bottom end of that right now, so it’s a great conservative play with a nice 17% return on equity.

Steven Halpern: Now, you’ve also considered Indonesia as one of your favorite areas for investment. What’s behind your bullishness on that market?

Carl Delfeld: Well, Indonesia is probably the most overlooked market in the world. You know, most people have just a vague idea it’s down there somewhere around Australia, but it’s really quite a dynamic country that’s on the right track. It’s three times the size of Texas.

It’s a democracy, and they had a presidential election, and a re-election, and now they have another one this summer. Things seem to be going well. The Jakarta mayor looks like he may be the next president, which would be a great thing for the country.

It’s a member of G20, the largest 20 economies in the world, which would surprise people. It doesn’t have a lot of debt. Its government bonds are investment grade, believe it or not, and it really has a growing middle class.

The Boston Consulting Group recently did a study and they expect that Indonesia’s middle class is going to exceed 75 million in the next ten years, so it’s a great market. Just to tell you about the Indonesian market and what it’s been doing, it had pulled back late last year, it had a pull back.

This year, it’s up 16%, but I think it’s still—I would recommend the buy of Indonesia, and again, the shotgun approach would be the Aberdeen Indonesia Fund (IF), which, again, is a basket of companies.

Steven Halpern: Now, last year when we spoke, you talked about the Asia Frontier Fund and, at the time, its top weighting was in Vietnam and you happened to agree with that position. Do you still recommend the fund?

Carl Delfeld: I do. Actually, the Asia Frontier Fund has done well. It’s up 25% over the last two years and that’s in a very difficult environment where emerging markets were flat or down. Vietnam is still the largest holding and Vietnam is doing well.

Again, I mentioned the wage rate is much lower than China. There are some reforms that are being in place, but the main driver of the Vietnamese market has been very low valuations.

Now, they’ve come up a little bit, but I still think it’s attractive and over the last month, it’s not a bad time to move into Vietnam.

Market Vectors Vietnam (VNM) is the ETF. It’s off like 9% over the last month, so I think it’s a good opportunity. But these funds, like the Asia Frontier Fund, are a really good way to capture growth in these markets.

Steven Halpern: Well, we really appreciate you taking the time. Thank you for joining us today.

Carl Delfeld: Thank you, Steven, great to be with you.

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