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The Case for ASEAN Markets in 2003
Wayne Lau, Leading Assets United Fund

February 2003

The following article was produced by Wayne Lau, a Director of the Leading Assets United Fund (LAU Fund). The LAU Fund is an equity long/short Asia excluding Japan Fund which focuses on value investments throughout the ASEAN and North Asian regions. Mr. Lau is based in Singapore

Since 2000, ASEAN has been plagued by a number of highly publicized problems:
  1. Weak foreign investor interest following a) office closures and the dropping of research coverage by most international stockbrokers, b) decisions by some global funds to withdraw investment in selected markets (such as CALPERS) and c) lingering fears of capital controls (such as implemented by Malaysia in 1998).
  2. Political fears following the tracing of Al Queda links and post 9/11 violence to Indonesia, Singapore, Malaysia and the Philippines.
  3. The clear emergence of China both as a major competitor for foreign direct investment and a dominant market in Asia.
Yet in spite of these hurdles, ASEAN stock markets have generally outperformed world markets.

ASEAN Stockmarket Performance

This raises two questions: Why has ASEAN performed so well relative to the rest of the world? And will this relative out-performance continue?

Reasons for ASEAN's out-performance

Underlying ASEAN's negative headlines, there has been a quiet recovery in company profits and stability in balance sheets since the 1997-1998 Asian crisis.

Earnings Index (1/97 = 100)
Singapore Malaysia Thailand Indonesia Philippines
Jan-97 100 100 100 100 100
1997 85.5 67.7 -18.3 44.7 80.3
1998 51.3 -16.4 -119.7 -41.6 52.6
1999 44.7 8.1 -69.3 -15 6.9
2000 72.6 43.8 -24.3 18.2 -15.7
2001 65.9 41.2 16.5 34 9.5
2002 45.4 65.5 21.2 50.7 19.3

Net Debt / Equity

Singapore Malaysia Thailand Indonesia Philippines
1997 0.28 0.53 3.14 1.55 0.74
1998 0.28 0.75 2.37 2.08 0.7
1999 0.11 0.7 2.3 1.47 0.65
2000 0.3 0.72 2.16 2.58 0.8
2001 0.34 0.65 1.84 1.12 0.83

Indeed corporate earnings in some markets have been among the world's fastest growing since the popping of the US bubble in 2000. The combination of stronger earnings and lackluster stock prices have created low P/E's in selected markets. These valuations are often attractive compared both to historic levels and to overseas markets.

In past cycles, foreign funds usually provided the liquidity needed to re-rate the prices of ASEAN's undervalued stocks. But since the Asian crisis, stock prices are being set by a) local liquidity from mainly ethnic Chinese groups and b) institutions such as regional unit trusts and government linked investment funds in Singapore and Malaysia. For example, highly liquid Taiwanese investors now often dominate trading in Thailand. This may be one reason why Thailand was one of the first ASEAN markets to re-rate.

Price Earnings Ratio

Singapore Malaysia Thailand Indonesia Philippines
Jan-97 18.1 24.9 12.2 22.1 23.9
1997 13 11.5 NM 12.9 10.7
1998 20.4 NM NM NM 17.7
1999 41.2 133.8 NM NM 142.8
2000 18.9 20.8 NM 18.7 NM
2001 16.5 22.6 16.7 8.4 43.7
2002 21.1 13.2 15.5 7.1 18.2

Can ASEAN's out-performance continue? The case for Malaysia and Indonesia

Although Thailand should continue to do well, future performance should rely more upon underlying earnings growth rather than continued valuation re-rating. Other cheaper ASEAN markets such as Indonesia, and even Malaysia, might offer more scope for P/E expansion. While these markets may not have Thailand's traditional levels of comfort with regional investors, their re-ratings are usually fast and triggered by unusual events. In particular, Malaysia and Indonesia may benefit from the resolution of the Iraq war.

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