Southeast Asia is on the rise – its share of the global economy grew 1ppt in the past decade to 3% in 2011 (USD2.2trn). But the member countries of the Association of Southeast Asian Nations (ASEAN), home to 600m people next to the growth engines of China and India, still performed below potential, averaging just 5% growth in the past decade. The UN estimates that by 2030, ASEAN’s population will be 700m, adding 65m workers. However, recent slowdowns in Indonesia, Thailand, Vietnam and Malaysia raise the question: will ASEAN reap the ‘demographic dividend’ their neighbours enjoyed? The challenge is to create jobs to absorb the growing labour force and build infrastructure to boost productivity.
We believe investment and governance in ASEAN have changed for the better in recent years. For instance, Indonesia, the Philippines, Vietnam and Myanmar have taken steps to reduce debt, control inflation and improve the business environment. This has attracted investment from foreign investors: FDI inflows to ASEAN were USD111.4bn in 2012 – 19% of gross fixed capital formation in the region and almost equal to China’s USD121.1bn. But it can and should do better.
ASEAN’s low capital stock and high population growth rates mean it needs all the investment it can get, from home and abroad, creating an environment for jobs and productivity to flourish. The agreement to put in place an ASEAN Economic Community (AEC) by 2015 points to an improved policy environment and regional integration. Intra-regional investment and trade should increase in the coming decades. We expect the debt burden in the Philippines, Indonesia and Vietnam to narrow, and output and consumption to rise.
Eoin Treacy's view As one of the global economy’s
major growth engines ASEAN represents an integral part of the rise of the middle
class investment theme. The fact that governance has improved across the region
over the last decade has helped unleash the productive capacity of some of Asia’s
poorest people. Provided the trend of improving governance continues, the long-term
outlook is likely to remain optimistic.
However, in the short to medium-term, a number of ASEAN countries are dealing with current account deficits which were at least in part caused by internal demand for imported goods superseding the previous focus on exports. This can be viewed as an interim situation while the consumer and service sectors expand, but it has resulted in investors taking a more cautious attitude towards the region.
The US listed Global X ASEAN ETF accelerated to a May peak near $19 and has been ranging below $17.50 since June. It is currently pulling back from the most recent retest of that area and a sustained move above it will be required to confirm a return to medium-term demand dominance.