ASEAN’s Investment Bank

WHAT HAPPENED TO ASEAN’S INVESTMENT

RLINGS?

In Latin America, it was clear that the Kirchner regime was in its dying days, leaving Argentina poised to ascend from the ashes. Romania, the European Union’s second-poorest member, was destined to converge with the richer West in a pre-Brexit EU.

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1Australian Competition & Consumer Commission (2017) ScamWatch, Nigerian Scams2United Nations (2017) World Population Prospects

my book, Frontier ~ Exploring the Top Ten

Emerging Markets of Tomorrow, with a spreadsheet of star money managers and a round-the-world ticket.

My mission: to determine which frontier markets have the potential to become future BRIC economies – as seen through the eyes of the investors who discovered these building blocks of the emerging world back in the day.

Among this elite set of top-performing and big-name fund managers, everyone loved Africa. The “hopeless continent” was finally “rising.” Nigerian investments, no more a euphemism for 419 scams1, instead supported an economy that was overtaking South Africa, with a youthful population that the UN estimates will top the USA as world No. 3 behind India and China by 20502.

I t’s four years since I started research for

gainst a backdrop of drone bombs, perpetual conflicts and corruption

scandals, the Karachi index has soared in triple digits. Pakistan was already being perceived as a mainstay emerging market investment long before MSCI returned the country to its benchmark EM index in May.

Sure enough, Pakistan has followed a familiar pattern, tumbling 25 percent in five months as frontier funds lightened up on an old favorite while EM funds shied away from buying into a country facing political upheaval and a deteriorating economy. After the ouster of Prime Minister Nawaz Sharif, further political disruption looms with ongoing corruption cases and Parliamentary elections next year. Meanwhile, pre-election populism is preventing a necessary devaluation in the rupee, hurting exports and depleting foreign currency reserves. Pakistan’s new emerging market investor base will tread cautiously into the mire.

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his was the top pick for one of the 10 fund managers I was to travel with for

my research. I spent two days at the Bangladesh Embassy obtaining my journalist visa. I booked my flights to Chittagong and Dhaka. And then, in January 2014, the investment case imploded. Pre-election protests immobilized the capital city, forcing us to abandon our planned trip.

For the most part, politically driven violence in Bangladesh has since subsided, with fewer bombings and no repeat in the last couple of years of the “hartals” – total shutdowns of workplaces and commerce2. But violence continues, and there’s a cycle: the real test will come in the run-up to elections due by early 2019.

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1Walter Brandimarte (2010) Reuters, “Analysis: upgrade not always a boon for emerging markets”2Hasnain Malik (2017) Exotix Capital, “Sunrise, not sunset”

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fter decades of international isolation, the Burmese economy was a blank sheet

of unexplored opportunity from consumerism to tourism and mining. Growth topped all otherASEAN economies as trade and commerce opened up with the election of Aung San Suu Kyi in 2015 and the subsequent surprise move by BaracKObama to lift all remaining US sanctions.

But Obama’s move was injudicious. He did his

fellow Nobel Peace Prize Laureate no favours.

Sanctions were the most effective weapon against

Burma’s mighty Tatmadaw and its continued grip

on government and parliament. Wielding the stick

of sanctions, Suu Kyi might have felt empowered

to condemn and even curtail the army’s onslaught

against the world’s largest stateless population.

Instead, to the outside world’s frustration, Suu Kyi

meekly stresses the importance of the rule of

law in tackling conflict. Her words ring hollow in

Rakhine and the dozens of other conflicted regions

around the Burmese perimeter where Tatmadaw

is a law unto itself.

In the old teahouses and new towers of Yangon,it’s easy to dismiss events on the country’s borders as peripheral to the real economy. But to many international investors, Rakhine is at the centre of Myanmar’s story – and not just politically. Just off the coast of Rakhine – the poorest of Myanmar’s 14 regions by far – lie the makings of a multi-billion dollar oil and gas industry.

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Pipelines run from here to southern China. Part of President Xi’s One Belt, One Road plan is to link Rakhine by rail to Yunnan and build an industrial centre in the Rakhine town of Kyaukphyu. India is in close competition, funding a port development in the state capital, Sittwe, and money is also coming in from Korea and Japan.

Sanctions or no sanctions, Myanmar risks becoming once more a no-go zone for Western investors.

While Western companies such as Chevron face pressure

from rights activists to withdraw from Rakhine, the more

significant and steadfast investor in the region is Beijing.

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arrived in Sri Lanka’s north and took an airforce minibus to a military checkpoint

nearby in Kankesanthuray. KKS, as it’s known to locals sharing the Indian habit of turning everything into initials, is a hundred square kilometers of pristine shoreline, grasslands and palmyra forests. A rusting white lighthouse marks where a customs office once monitored ships plying the 30-kilometer Palk Strait to India.

Pride of KKS is the Thalsevana Holiday Resort. On a bandstand with wicker chairs on a polished red floor, I meet Ghanan. In “the good old days” before the war, his parents would bring him and his five siblings here for tea at the small rest house. The army has turned it into a 30-room hotel. In place of bell boys and porters are green-fatigued soldiers.

Ghanan’s Tamil Christian family moved to KKS in 1967. One day in 1984, they took the train to Colombo for a family wedding. Clashes broke out between Tamil Tiger and government forces, closing down the railway, so the family stayed in the south.

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We drive past tracks where the train station had stood. To our right, grassy plains sink down to a huge limestone quarry. Towering above is the idled hulk of the KKS cement factory. A soldier patrols, automatic rifle by his side.

“Look to your right,” says Ghanan, “and remember what you see.” There’s nothing but a pile of old bricks.

When the soldier is out of sight, Ghanan stops the car and pulls a photo from the glove box. It’s him and his sister holding hands outside a grand Italianate house. The photo was taken less than four months earlier.

We drive past dozens more rubble piles and then rows of empty yards. Each has a gray stone circle around a deep hole.

“You can tell where the houses were because there was no running water here. Everyone had to dig their own well.”

These were the final days of Mahinda Rajapaksa’s administration, a government accused of perpetuating wholesale displacement in the region, and rampant corruption.

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After our aborted trip to Bangladesh, Sri Lanka topped the bucket list for one of the major institutional investors included in my book.

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Amidst the disappointment over macro policy, abeacon of hope shines, ironically from a failed vanity project in ex-President Rajapaksa’s hometown. The Mattala Rajapaksa International Airport in the remote Hambantota district has been dubbed the world’s “emptiest international airport.” It caters to seven passengers per plane on average. Even so, China and India are vying for it. Two weeks after China bought 70 percent of the nearby Hambantota deep sea port, India challenged a Chinese bid for this tiny airport, offering to invest $205 million to take a 70 percent share4.

Rajapaksa had envisaged investment in infrastructure transforming this rural backwater into Sri Lanka’s second city, creating a model for the economy. Now, jealousy between the regional superpowers is proving him right.

John Keells, the largest, with interests across property, ports, food and drinks, may be about to add a new landmark casino resort to its portfolio. Out of all of the companies visited for my book, John Keells ranked No. 8 from the investors’ top picks, having generated consistent double-digit annual returns since the end of the civil war in 2009. Investors cite the transparency of the company’s management, its exposure to Sri Lanka’s biggest growth areas, and – crucially – its relative liquidity within one of the region’s smaller stock markets.

63Transparency International (2017) Corruption Perceptions Index 20164Dipanjan Roy Chaudhury (2017) The Times of India, “Habantota: China has seaport in Sri Lanka, India may get an airport”

ajapaksa’s surprise defeat in the 2015 election heralded a President

promising change. But while MaithripalaSirisena’s government has reassigned some occupied land, much of the Tamil north remains under military control. Residents say the land that has been redesignated has poorer soil quality. Corruption, if anything, has got worse: Sri Lanka deteriorated in Transparency International’s Corruption Perception Index by a point between 2015 and 20163. Torture remains “common practice” by security forces, says the UN.

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Lately, though, Vietnam has looked less benevolent and certainly less stable. Hanoi stands out as the most strident critic withinthe ASEAN against Beijing’s land grabs in the South China Sea. While the normally firebrand President Rodrigo Duterte has watered down Philippine criticism of Chinese incursions, Vietnam has become the sole regional voice agitating for tougher statements of opposition. After a meeting of ASEAN foreign ministersin August, China Daily accused Vietnam of seeking to “sow seeds of discord” within the bloc.

One of Donald Trump’s first actions as President was to snuff out all prospect of improved trade links by killing the long-negotiated Trans-Pacific Partnership agreement. Meantime, relations with the EU, Vietnam’s biggest trading partner after China, have also suffered a blow – the consequence of growing unease over Hanoi’s human rights record.

The latest flashpoint centers on embezzlement charges levied against a former executive at state-owned PetroVietnam Construction. Facing accusations punishable by death, Trinh Xuan Thanh managed to slip away from Vietnam to Germany – only to be abducted in Berlin. In August, back in Vietnamese custody, Thanhmade a televised confession to the charges against him.

hen I meet veteran money manager Mark Mobius of Franklin Templeton

for breakfast in Ho Chi Minh City, he’s deepin conversation with colleagues about events across the border in Thailand. Bangkok’s market is plunging, wiping out a full year’s gain, asthe government teeters on the brink of another military coup.

Wearing a yellow shirt with white trousers, white shoes, white socks and a white watch,the octogenarian grandfather of emerging market investing is in a relaxed mood. He cut exposure to Thailand a couple of days earlier.

“I’d rather be here than there,” says Mark.“It’s more stable.”

Mark’s reference point predates Ho Chi Minh, Mao or Marx. “If you go back to Aristotle, the ideal form of government was a benevolent dictatorship, and Communists have tried to achieve that.”

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It’s a challenging notion: Franklin Templeton – the Wall

Street juggernaut with the “first American,” Benjamin

Franklin, for its symbol – taking comfort in the stability of

Vietnam’s Communist regime.

Strong female leadership is a byproduct of the Vietnam war, according to Lei Thi Thu Thuy, Vingroup’s CEO before she recently handed overthe reins to a female colleague to build an internet business. “During the war, pretty much all the men went south and the women had to take care of hard labors and everything else, so we never grew up thinking that because we’re women we have to stay at home.” Women, she says, are more careful, don’t spend as much and really look at the numbers “instead of drinking and having fun”8.

Vietnam stands out as “the most classically emerging market story” given its low political risk, strong exports and FDI, rising consumption and stock market reform, Exotix Capital wrote in a recent report9.

The country ranks second only to Nigeria in my book for potential to become a future powerhouse economy.

ut Merkel’s Germany wasn’t preparedto give up on its VIP guest. Alleging

kidnap non its soil by Vietnamese spooks, Berlin retaliated by expelling an intelligence officer and threatening to halt hundreds of millions of euros in annual aid spending.

In picking a fight with the EU’s largest economy, Vietnam’s timing could hardly have been worse, coming just as the bloc prepares to consider a free trade agreement with Hanoi.

For now, however, there has been little consequence for the economy from Vietnam’s diplomatic clashes, neither with the EU nor China. Far from slowing, Vietnam’s exportsto China jumped an annual 43 percent in the first half of this year to $13 billion. There’s no sign of personal animosity either: 1.9 million Chinese visited Vietnam in the first half of this year, 60 percent more than a year earlier5.

The World Bank, in a 650-word report on Vietnam’s economic outlook published inJuly, cited stability seven times in reference to the economy, growth, policy objectives, the exchange rate and inflation6. A doublingof Vietnam’s economy this decade has been underpinned by surging capitalization onthe stock exchange: Vietnam now has 23 companies with over $1 billion market capitalization7, catching up with Malaysia’s 26.

Most notable in Vietnam’s corporate landscapeis that women run some of the most successful companies, including the largest – Vinamilk –the dairy producer that’s the No. 5 pick outof all the companies visited for my book, as well as Vingroup, the property company owned by the country’s first billionaire,Pham Nhat Vuong.

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Asian frontier markets offer an attractive mix of compelling growth prospects, transformation of productivity, and ongoing market reforms. But for all their projected potential, there are - as our guest writer suggests - varying degrees of investment opportunities.

We at Maybank Kim Eng offer our investors the best access and insights into Asia Frontier countries, almost all of which are in or around ASEAN, our home region.

5My Pham (2017) Reuters, “Despite strains, Vietnam and China forge closer ties”6Nguyen Hong Ngan (2017) The World Bank, “Vietnam’s economy shows fundamental strength, with stable and positive medium term outlook”7Vietnamnet (2017) “Inside H1 business results of 23 firms with over $1bn on stock market”8Gavin Serkin (2015) Bloomberg, Wiley, “Frontier: Exploring the Top Ten Emerging Markets of Tomorrow”9Hasnain Malik (2017) Exotix Capital, “Vietnam equity strategy: consensus positive but growth of rare quality”

An impassioned advocate of increased investment

in developing countries, Gavin Serkin has been a

prominent writer, broadcaster and commentator

on the frontiers of finance for over two decades.

His book, Frontier, was acclaimed as a ‘must

read’ by the Financial Times.

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For Any Enquiries : AIO@maybank-ke.com.sg

Editor-in –Chief : Patrick Han(Maybank Kim Eng)

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