Strong sentiment supporting ASEAN markets may be misguided if reform-heavy agendas don’t start to progress significantly, according to Citywire A-rated David Raper.
In an investment update, Raper said the ASEAN economies are experiencing increased investor attention, as many emerging market investors are buoyed by political change in markets such as Indonesia.
‘A clear economic reform path could unleash growth, but little progress in this direction has been made so far, while valuations in ASEAN are well above long-term averages,’ Raper said.
‘Today the ASEAN region finds itself in a middle income trap. Investment into hard and soft infrastructure has not grown since the Asian crisis and GDP per capita stagnates. On the other hand the region has enviable demographics which is the principal driver of economic growth.’
Not grim up north
In the $188 million fund at present, Raper and Sisowath have instead focused more solidly on China and India, the North Asia nations. China is currently a 13.7 percentage point overweight in the fund, while India is a 14.7 percentage point overweight.
‘Currently, the markets are positive on South-East Asian economies and negative on North-East economies. Yet this is contrary to how we see the marginal changes in fundamentals.’
He said the reform agendas in these markets are more tangible with efforts already coming into effect. For example, Raper said India had made strong steps to open out its ‘relatively closed economy’ and remove its infrastructure bottlenecks.
‘The government has produced a clear reform agenda in this direction, which is an important first step. India’s challenge is to attract more investment so as to raise the sustainable growth rate while reducing structural weaknesses including bureaucracy and corruption.’
China on track
Meanwhile, Raper said China has evidently sped up reform in order to steer the deleveraging of its economy and reduce the level of fixed asset investments.
He said: ‘In the past this has undoubtedly sheltered it from a slump, but today creates an excess level of investment. For China the emphasis is on raising the efficiency of human, environmental and financial resources.’
‘Hokou, SOE and financial market reforms point in the right direction. One of the most important results should be a lower but more sustainable pace of economic growth.’
The Comgest Growth Asia Pacific ex Japan US Dollar fund returned 44.5% over the three years to the end of November 2014. This compares to a rise of 36.8% by its Citywire benchmark, the MSCI AC Asia ex Japan TR USD, over the same timeframe.