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INVESTMENT: Securing Serious Returns from the South East Asia Sell-Off
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Even some of the most seasoned and informed global market observers were taken aback when a number of emerging market equities started taking big tumbles last month. Towards the end of August it became blindingly obvious that the actions of the Federal Reserve and the weakening currencies of South East Asia could devastate investor confidence. The way things are looking, the situation in this region may well go from bad to worse before the end of 2013.

But investors need not fear. These roaring tigers may be taking a beating at the moment, but in the long term nothing will stand in the way of sound economic fundamentals. And to make it even more tempting, some of the world’s most undervalued assets recently got even cheaper.

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Troubling Times for Emerging Economies

Looking at Asia as a whole, there are definitely a lot of very serious financial cracks starting to show. Chinese debt levels and slowing GDP growth are spooking speculators and causing a great deal of uncertainty- particularly in sectors such as mining and commodities. India, which has seen a dramatic devaluation of its currency over the last couple of years, is facing a worsening economic outlook with GDP down below 5%, inflation stuck around 10% and a current account deficit which is getting out of control.

Further south we see Indonesia suffering from a similar slowdown, also due largely to its increasing trade deficit, rapidly weakening currency and inflation; as well as a big slow down in external demand for its abundant natural resources. Thailand, which was an equity investor’s dream last year, surprisingly slipped into recession in the first half of this year and this has started to have a sizable knock-on effect in its equity markets.

To make matters worse for those investing in these countries, the US Federal Reserve has announced that it will pull back on its colossal bond buying and quantitative easing programs. Even just the talk of this happening has been enough of a reason for many large scale foreign investors to pull their money out of the emerging markets and back towards the strengthening economies and currencies of the developed world.

So much foreign cash was pulled out of the South East Asian markets in August that the Jakarta Stock Index went into a week-long freefall and the stock markets in nearby nations followed suit- albeit on a smaller scale. There has been a slight bounce back since then, but investors can be sure that when the Fed and other central banks stop working their monetary magic, the ‘smoke and mirrors’ of excess liquidity will almost certainly drive these markets towards a big correction.  

 

Reasons to be a Raging Bull in a Bear Market

From an investment perspective, Thailand and Indonesia could fittingly be described as the ‘fallen angels’ of the emerging Asian markets. In 2012 the Thai SET Index as a whole performed extremely well, growing by a staggering 36%. With strong fundamentals, a sustained period of political stability and a foreign-friendly investment environment, many thought that Thailand’s assets would continue to see strong gains this year.

Companies in Indonesia and Malaysia have also been providing strong earnings and good corporate development, particularly in the small cap space, for some time now. All of this has excited speculators who are in search of golden growth opportunities. The truth is that these markets have not actually lost much of their intrinsic value, but they are being hampered by a wave of unfavourable monetary policy turbulence.

For savvy investors and bargain buyers the time seems right to invest in South East Asian equities. The current correctional cycle is a good thing for long term value investors as it means that prices have come back down to earth and are now at levels which make them a good opportunity for capital appreciation.

The major reasons to back these Asian tigers are: 1. The demographics needed for sustained economic growth are very much in their favour 2. They are resource rich 3. They are home to a rapidly expanding middle classes that are fuelling robust domestic consumption 4. They are very well positioned geographically to benefit tremendously from a rebound in China, and 5. South East Asia is arguably the most dynamic region on the planet in terms of social, cultural and economic change!

 

altStick to the Indexes

Even if South East Asian equities stay depressed for a while, the sound economic fundamentals will definitely spur them higher eventually. In years to come the growth and development in countries such as India, Thailand, Malaysia and the Philippines will eclipse any short term shocks and downturns. With that in mind, the best way to buy into these markets right now is to acquire a broad spread of assets which will give you good returns over time as the macro economic situation improves. You could try to pick out good individual growth stocks from within these markets, but in a situation where the index as a whole has taken a big hit, it is safer to bet on the resilience of an entire sector or the economy as a whole.

The Market Vectors ETFs give you the broadest exposure to these countries. Both the Market Vectors Indonesia Index (IDX) and the Market Vectors Indonesia Small Cap Index (IDXJ) should be prime targets for growth hunters. Similarly the Market Vectors Vietnam ETF (VNM) is looking pretty cheap at the moment. For Thailand and India, one may consider holding out for a while to see how the macro economic circumstances play out. If Thailand returns to growth in the third quarter then the iShares MSCI Thailand Capped Investable Market ETF (THD) would be worth at punt. With regards to Hong Kong, Singapore and the Philippines, the latter of which is on track to be the biggest growth story of 2013, it is probably best to hold on to your cash and wait for a better time to buy in! 
 

By Josh Cooper
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