Vietnam to drive Asean recovery in 2014, says Barings’ SooHai Lim
SooHai Lim, investment manager of the Baring ASEAN Frontiers Fund, is set to drive wider recovery in Asean this year, aided by strong exports coming off multinational direct investment in areas such as electronics manufacturing in the country.
In terms of the Asean market, we find more interesting ideas at this point in Vietnam. It is a market we like this year, and one of our biggest overweight holdings versus the benchmark. The government is tackling bad debt in the system, and markets are very attractive in terms of prices. Since the start of this year, Vietnamese corporates have also gained from corporate tax cuts from 25% to 22% – which are due to be cut further to 20% in 2016 – giving a significant lift to profit growth.
Barings believes that the resurgence in Vietnam will help drive a wider recovery in the Asean region. While markets in Indonesia, Thailand and the Philippines declined in the second half of last year, in 2014 so far, markets have recovered. While one cannot rule out the possibility of further volatility, the stage is set for a better second half to the year as cyclical and political headwinds abate. Barings, for one, is looking to add to exposure on any market weakness.
The second half of this year could be particularly rewarding for investors in Indonesia. Jakarta governor Joko Widodo is his party’s nominee for the July presidential election and this could be good news for investors given his successful track record of reform. Barings anticipates that under his leadership, Indonesia will embark on further reforms more decisively and that will support Indonesia’s medium-term growth outlook.
The weakness for Indonesia is the current account deficit, which reached 4.4% in the second quarter of last year. After some initial policy mis-steps, the government and Central Bank raised fuel prices and interest rates and allowed the currency to depreciate sharply in order to reduce imports and slow growth to address the current account deficit – the Central Bank raised interest rates by 175bps and let its currency depreciate strongly by almost 20% last year. As a result, we are starting to see improvements, particularly on the trade front.
For an emerging economy like Indonesia, investors should be comfortable if the deficit remains at around 2.5% of GDP. In fact, if you look at the trade numbers for the fourth quarter, the current account deficit actually came in below 2%.
With regards to Thailand, foreign investors have been quite nervous. Year-to-date foreign investors have net sold about US$900m worth of stocks in Thailand – coming on top of the US$6bn outflows last year. While in the short term investors are clearly concerned about political developments, whether that affects sentiment in the long-term will depend on how the political situation evolves. A new functioning government, albeit an interim one, would likely have to address the economy among its agenda, and the market should, in this scenario, react positively.
The main risk to the Asean region is political, and the political developments will remain keenly watched by investors. Another risk is whether the developed market recovery is strong enough to actually aid an export-led recovery across the Asean region. On the positive side, there are a number of powerful, positive domestic themes, with investors remaining focused on companies which have good growth prospects and earnings resilience that appear well positioned to benefit from the twin drivers of regional growth: rising consumption and on-going investment in infrastructure projects.
The Asean region has historically lagged the likes of China and India in infrastructure investment, but Barings is encouraged that regional governments are tackling bottlenecks as they recognise that investment in infrastructure assets is a requisite to supporting economic and population growth.