Despite the veritable stock market crash in Vietnam last year, Southeast Asian equities kept their heads above water. This was mainly due to the positive performance of Thai and Indonesian stocks. For future performance, eyes are on the direction of the dollar, the positioning of global investors, as well as the global economic outlook.
The Association of Southeast Asian Nations (ASEAN) is an alliance, mainly economic, between 10 countries in Southeast Asia, Indonesia, Thailand, the Philippines, Singapore, Malaysia, Vietnam, Myanmar, Cambodia, Laos and tiny Brunei. Their combined GDP exceeds 3,300 billion euros, or more than three times that of the Netherlands.
While investors may know most of the countries mainly as holiday destinations, this trading bloc is of great geographical importance, given its location between superpowers India and China. China in particular has huge interests in the region, which also attracts large investments from Japan and South Korea. Companies looking for a cheaper production base and/or attracted to the market of over 650 million consumers are expanding their operations in the region.
While most economists are positive on the long-term outlook, there are fears that the trade-oriented economies of Singapore, Thailand, Malaysia and Vietnam will be affected by any slowdown in global growth and weaker demand for goods in 2023.
The stock market is not the economy
All the optimistic economic headlines in the media notwithstanding, this does remain a difficult market for securities investors. Over the last 10 years, the annualised euro-denominated return of the MSCI ASEAN Index was just 1.7 per cent, while the MSCI World Index posted a return of 11.1 per cent over the same period. Going back further in time, however, we see that the MSCI ASEAN Index did outperform the MSCI World Index between 2000 and 2010.
Whether that can be repeated in the 20s of this century will largely depend on the direction of the dollar, the positioning of global investors, as well as the global economic outlook. Although good performances in Indonesia and Thailand enabled the MSCI ASEAN Index to post a positive return of 2 per cent in 2022 compared to a 12.8 per cent loss for the MSCI World Index, annual returns over the last three years were still lower for Southeast Asian equities.
Vietnam
The Vietnamese equity market, which makes up less than 3 per cent of the MSCI ASEAN index, was one of the worst performers in 2022 and deserves special mention as it demonstrates the risks investors face in less developed markets.
The heavy 40.2 per cent drop in the MSCI Vietnam index last year was caused to a limited extent by external factors, including a rise in the US dollar (by 9.3 per cent against the Vietnam dong between early January and early November) and a decline in US stock markets due to the Fed’s aggressive interest rate hikes. In addition, domestic issues, including some high-profile arrests and harsh regulatory action by the government in the bond market, played a particularly important role.
The latter made it increasingly difficult for many property developers to access credit. According to experts, the cash flow problems are therefore more due to the difficulties in refinancing their outstanding debts, which are necessary to complete projects and repay their loans, than to the demand for real estate. In February, Novaland, one of the largest developers in the country, missed another coupon payment. Although there is a possibility that the government has not yet finished its major «clean-up», stock valuations look attractive after the severe correction and assuming annual economic growth of 5 to 7 per cent and double-digit profit growth.
There are only a few Vietnam open-end funds available for Dutch retail investors including TCM Vietnam High Dividend Equity and VinaCapital Vietnam Fund. There are also Dragon Capital’s Vietnam Enterprise Investments Limited (VEIL) and VinaCapital’s Vietnam Opportunity Fund (VOF), two closed-end funds traded on the London Stock Exchange.
The Top 5
This week’s Top 5 lists the three best-performing funds in the Morningstar ASEAN Equity category over 2022 (of which a distribution fee-free fund class is available in the Netherlands). Only three funds are available in this category, hence a Top 5 consisting of three funds.
Marked off at one is Invesco’s ASEAN Equity fund managed by Wei Liang since September 2018. He joined Invesco in November 2013 and played a key role in this ASEAN strategy. Liang worked closely with former lead manager Jalil Rasheed and took over the torch permanently in September 2019. The fund is heavily overweight the financial sector (Bangkok Bank, Bank Rakyat Indonesia and Bank of the Philippine Islands), which accounts for nearly 70 per cent of the portfolio. Also, as of end-January, the fund had no exposure to energy, technology, healthcare and utilities. Also notable are the underweighting of telecom giants Singapore Telecommunications and Tekom Indonesia Persero. The fund has no positions in Vietnamese companies and benefited from underweighting in technology stocks in 2022 in addition to its strong overweight to the banking sector. The fund outperformed 98 per cent of its category peers last year.
JP Morgan
The short list also includes the JPM ASEAN Equity Fund, a JP Morgan fund that has been given a Morningstar Analyst Rating of Gold by Morningstar’s fund analysts. The fund is managed by experienced Pauline Ng and she is closely supported by her five-member ASEAN team, which has an average of 17 years of investment experience, including Desmond Loh, Stacey Neo and Chang Qi Ong. The fund’s focus is on quality companies, but the manager has the resources and flexibility to invest in smaller stocks as well.
The portfolio is concentrated and the five largest positions are in Asian major banks, DBS, UOB and OCBC from Singapore and Bank Central Asia and Bank Rakyat from Indonesia. Over the last 10 years, the fund has been able to outperform both the competition and the index. In 2022, the strategy managed to present a positive return, finishing in the 38th percentile of its category.
Thomas DeFauw is manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five mutual funds or providers every week.