Southeast Asia needs stronger links between its markets if the region is to achieve its potential as an investment destination, argued Tan Shu Shan, group head for consumer banking and wealth management at Singaporean bank DBS.
She was speaking at the Bloomberg Markets Most Influential 2016 forum last week on a panel of heavy-hitters. Also present were Shahril Ridza Ridzuan, chief executive of Malaysia's $160 billion Employees Provident Fund, and Benjamin Way, Asia CEO of Australia's Macquarie Bank.
The trio spoke abou the benefits of the markets of Indonesia, the Philippines and Thailand, but also pointed to the challenges the region faces, suggesting integration would take years to come to fruition.
Since its emergence in December last year as a regional trading block, Macquarie’s Way said there had been little further development. “It is an important initiative and exciting concept; at the moment it is not much more than that,” he noted.
Way added that investors did not yet treat the Asean region as an economic community, still viewing it as individual countries.
Seeking stronger trading links
Tan said the regional challenges included illiquidity in the stock and bond markets and that there was no single currency to smooth intra-regional trading. She wants to see stronger links between the region’s financial markets, such as a successful trading scheme like the Shanghai-Hong Kong Stock Connect.
Moreover, Tan pointed to the cultural and political differences and varying economic cycles between the Asean countries, which she said "might precede group interest".
When it comes to individual markets in Asean, Tan saw Indonesia as having huge potential for growth through "digitalisation", referring to the take-up of smartphones, social media, mobile technology and the like. Having just attended a financial technology event in Jakarta, she said there was “energy, focus and ambition in Indonesia to take digitalisation to the next level”.
More fans of the Philippines
“We like the Philippines, despite what you read in the papers” said Way, referring to the outspoken comments and controversial approach of new president Rodrigo Duterte, who appears to be pivoting away from the US, its traditional ally, and towards China.
"The story on the ground is incredibly positive," said Way. He pointed to the growth in foreign direct investment, stock market gains and confidence that economic reforms would continue. These would make Philippines a very investible market, he added.
According to local media, FDI into the Philippines hit a multi-decade high of $8 billion as of end-April, up from $6 billion last year and $1 billion five years ago. That said, it was reported in late July that Duterte reportedly plans to cut tax incentives for foreign investors in a bid to boost revenues, which is likely to hit inbound investment.
Domestic equities rallied after Rodrigo Duterte won the presidential election in late May, rising 9% to peak at 8,102 on July 21, but they have fallen 6% since then. The PSE Index is now trading at 20.7x historical earnings, or 2.6x book value, according to Barrons.
Indonesia and Thailand reforms
Way also likes Indonesia and Thailand, in that order. He pointed to the size of their respective economies and reforms their governments plan to make, such as regulatory changes around foreign investments and pension capital.
The World Bank this week projected that Indonesia's gross domestic product (GDP) would grow 5.1% in 2016 and 5.3% in 2017, mainly supported by rising private consumption, a relatively stable rupiah, fiscal support, and accelerating government spending. It also revised upward its forecast for Thailand's economic growth for this year to 3.1% from 2.5% in June, on a par with the 3.1% forecast for 2017.
Indonesia, the Philippines and Thailand all have beneficial demographics, in the form of a young population with strong purchasing power, noted EPF's Ridzuan. Their private sectors are “very hungry, very entrepreneurial”, he said.
He added that there were opportunities in terms of infrastructure and logistic projects in Southeast Asia, as most of the infrastructure in the region was very old. EPF invests in these types of assets through funds.