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Hot Investment Frontiers

The untapped investment opportunities of 2013 seem to be here on our doorstep. But as Asia’s developing economies embark on a growth period likely to outstrip the rest of the world, how do you get in on it? Steve Dawson gets the inside scoop from the financial experts

For years now we have been told that the world’s untapped investment opportunities reside in Asia. Powerhouses China and India, driven by enormous populations, would see your money grow at rates not possible in the developed world.
Today, the story is similar but needs a tweak. Asia is still a fond hunting ground for buried treasure but the two behemoths of the continent are not the only places to start digging. Precisely what you should be digging for also remains varied, but an all-time favourite — good old-fashion real estate — is still highly regarded.
“Singapore, Hong Kong and the large Chinese cities were the tip of the iceberg. Now you go into places like Manila and Jakarta, and it’s absolutely raging red hot,” says HSBC’s head of investment strategy for Asia, Arjuna Mahendran. “In Jakarta, you can buy an absolutely top-end condo for close to US$700–US$900psf.”
When compared to Singapore, where prime real estate can top US$3,000psf, it demonstrates the potential price appreciation in these second-tier cities as the infrastructure develops and as economic opportunities improve, Mahendran points out. It is the infrastructural development that makes property and commercial investments in some emerging Asian markets so key.
Up Next: Indonesia, Thailand and the Philippines
Eugene Leow, an economist at DBS Singapore, highlights that even while recovering from the worst financial crises, over the past four years, in a country like Indonesia with 240 million people, the “demographic dividend” is kicking in. This bulging population is available for work, albeit hampered by a difficult environment, including the lack of infrastructure.
“The roads to ports are congested,” says Leow, adding that this impedes the commercial environment. “So at what point will the government get going?” Pretty soon, he suggests, and from Jakarta right across the archipelago.
The government’s 2011 Masterplan for the Acceleration and Expansion of Economic Development of Indonesia spells out the “building blocks to transform Indonesia into one of the 10 major economies in the world by 2025”, with a spirit of “not business as usual”. Ambitiously, it goes on to say: “To achieve this, real economic growth must reach seven to nine percent per year, on an ongoing basis.”
Indonesia is far from being the only example of this potential population-based boom. Global population has doubled since 1960, and that growth has come almost entirely from developing countries. Within them, people have steadily moved from rural to urban areas, as migrants seek greater income and a better quality of life.
“These people coming into the city, they eat more meat, which means the consumption of grain goes up exponentially because we must feed the cattle; then there’s an increase in electricity needs; housing needs; transportation needs. That’s what’s driving all of this. It’s an irresistible force, just from sheer numbers,” says Mahendran.
It is not just internal potential that sparks interest in parts of Southeast Asia. For instance, Thailand’s proximity to countries of the greater Mekong region, specifically Laos, Myanmar and Cambodia, make investments in Thailand attractive because it presents quick yet less risky access to opportunities that arise, whereas a more direct punt in its neighbouring countries might not be, says DBS’s Leow.
He also points to the Philippines as an under-appreciated investment destination, even if false dawns and rebirths have been a feature of its political and economic history. Things are different now, he explains, adding that both the government and central bank have managed the economy well enough to establish low government and private sector debt. Its strong fiscal position is also bolstered by low inflation. In addition, it has a strong education system, and its culture and language are highly conducive to companies from English-speaking countries looking to set up shop in Asia.
But what about corruption, political instability and the questionable rule of law in some of these economies, one might ask. If we are going to invest in bricks and mortar, should we be worried? “No more than you’d worry about somebody coming and smashing your window if you had a property in Belgravia in London,” says Mahendran. “In Jakarta, if you go and visit the place, you just get infected by the enthusiasm and the amount of activity that’s going on.”
Leow is also bullish: “There are some risks, even if you sign a contract, that have got to be resolved. But a lot of companies are willing to take that risk.” He adds: “In terms of honouring a contract, the Thais have been very good at that and that’s why people invest there.”
China: Build a Debt Portfolio
But if convinced by the potential of our emerging neighbours, how exactly should one invest? While feeding off this apparent infrastructural boom seems advisable, Mahendran thinks that funding it is an even bigger draw.
Take bonds, which are effectively an IOU. You lend money, usually to a government or corporation, for a fixed term, at a fixed interest rate. While some may still be uncomfortable with the Asian bond market, it is time for a change.
“Bond markets in Asia are at the point where equities were in the late 1980s and early 1990s. They’re just emerging like aircraft taxiing onto the runway and about to take off,” Mahendran says. “Asian debt is the big story, I think, for the next decade if not longer and I’m telling clients, ‘Start building a nice little debt portfolio.’”
The way he sees it, the Baby Boomers are starting to retire and therefore have a lower tolerance for volatility in their investments. Fixed returns are their preference and Asia is quite happy to provide that for them. But when he says Asia, he doesn’t just mean Indonesia, Thailand and the Philippines.
“The big potential lift for bond markets this year could be if the Chinese start issuing quasi-governmental debt from the big state-owned companies and the local governments. And if those issues come through, that’s a massive opportunity for investors, worldwide, to really start building up a Chinese treasury portfolio,” he says.
Hot as Chipotle: Mexico
Marc Lansonneur, the regional head of investment teams and market solutions at Societe Generale Private Banking, is also looking further afield. While content to see his investors snapping up Asian bonds, he also sees opportunities in South America, specifically in Brazil and Mexico. But the further afield you go, the less likely investors will have personal expertise. Therefore he suggests leaving it to the experts who manage fund-based selections in South American corporate bonds, with expected yields of five percent and above.
Mexico is a particular favourite, not least of all because of its proximity to the US. While the US economy is not entirely out of the woods, recovery is recognisable in the housing and banking sector which should have a knock-on effect, not just internally but around the world, and especially for its neighbours.
Says Lansonneur: “Mexico has shown a resilience, even more so than Brazil. There has been a reorganisation of the economy and there is more transparency. It’s an emerging country, so there’s still growth potential supported by domestic demand, which hasn’t been tapped yet. It performed better than Brazil last year.”
That could well continue if the US does indeed manage to shake off its economic woes and there are signs that it will be able to pull itself back from the edge, he adds. Migrant workers from Mexico will be pulled across the border to take up the slack, as will workers from other Latin American countries, and remittances to those countries will increase.
But ironically, as Mahendran points out, there is another economic giant on the other side of the world that’s also impacting Mexico’s growth, and just as positively — China. “Anecdotally, we are hearing that a lot of manufacturing is shifting to places like Mexico because in China, wages are rising at 20 percent annually for semi-skilled workers. So if you have a plant in China that is labour-intensive and low value-add, it will be shut down. We’re already seeing our clients do that and they’re moving into Mexico,” he says.
Time for Africa: Nigeria, Zambia, Tanzania, Kenya
There are even more exotic recommendations for the Asian investor, where the focus shifts from corporate bonds to government bonds. Lansonneur explains: “We have noticed for the past couple of years that there is growth in Africa. Our favourite picks will be Nigeria, Zambia, Tanzania and also Kenya.”
These are what Societe Generale likes to call frontier markets, not mature by any means and still “quite risky”, although Lansonneur is looking at yields above six percent this year.
Perhaps even riskier — but with a tremendous potential upside — are start-up companies that dabble in groundbreaking technologies. “In the biotech sector, you have some companies that are very mature but some that are at the start-up level and there is a high default rate. With these companies, when they have a product or project, it takes years before they get profitable. So it’s a real long-term investment, and it’s better to use professional asset managers’ expertise and go for funds,” says Lansonneur.
He also offers caution over that emotional play to boost the green-energy sector. Again, his advice: Seek the right expertise. Whether you stay close to home with your money, follow America’s recovery through Mexico or venture into the unknown in Africa, your underlying investment must have commercial substance.
Environmentally sound technologies are a heavily subsidised area and when the funding is eventually withdrawn, the project must stand on its own two feet. Such investments may feel good in the heart long before they feel good in the pocket.