Our figures show that the ASEAN markets have grown faster than the broader Asian indices in recent years, while they continue to display only low correlation to the western and emerging market indices that UK investors are most exposed to.
This means they could be an interesting investment for anyone who wants to diversify their portfolio while maintaining a high-growth profile.
The FTSE ASEAN index has outperformed the FTSE Asia Pacific ex Japan index over one, three and five years, according to data from FE Analytics.
Over the past five years it has more than doubled the returns of the broader benchmark, making 117.16 per cent.
Performance of indices over 5yrs
Source: FE Analytics
Breaking it down even further, a handful of countries have done particularly well.
SooHai Lim, manager of the Baring ASEAN Frontiers fund, says he is focusing on Thailand, Indonesia, the Philippines and increasingly Malaysia.
All four markets have more than doubled in value over the past five years, with the MSCI Philippines index up 221.05 per cent.
That country’s market has made 116.57 per cent in just three years, while the MSCI Thailand index is up 103.84 per cent over the same time period.
Performance of countries over 5yrs
| Name | 3yr returns (%) |
5yr returns (%) |
|---|---|---|
| MSCI Philippines | 116.57 | 221.05 |
| MSCI Thailand | 103.84 | 157.96 |
| MSCI Indonesia | 47.67 | 129.09 |
| MSCI Malaysia | 46.93 | 118.04 |
Source: FE Analytics
SooHai Lim says that indigenous demand from a rising middle class and deriving from investment on infrastructure is generating economic growth in the countries, making them less dependent on the health of the wider global economy.
"Thematically, the favourable economic fundamentals of ASEAN lead us to focus on direct beneficiaries of the region’s structural increase in infrastructure and consumer spending," he said.
"We continue to find the best representation of these types of companies in the fast-growing TIP [Thailand, Indonesia, the Philippines] economies, which collectively account for around 60 per cent of the fund."
"More generally, we would highlight that these strong domestic dynamics also mean that in our view, ASEAN economies are less dependent on global growth than other Asian markets."
The low correlation that Lim refers to could add an extra appeal to these countries.
Many analysts suggest that the broad emerging market indices have been sluggish in recent years as they are heavily focused on certain companies and industries that are highly dependent on the global economic cycle.
The globalisation of the world’s economy is also reducing the diversification benefits of investing in the major sectors and markets.
The low correlation of the TIP countries – and Malaysia – thus offers investors a chance to spread the risk in their portfolios.
Data from FE Analytics shows that the FTSE All Share shows a correlation of 0.76 to the FTSE Asia Pacific ex Japan index, which is followed by many of the popular emerging Asia funds.
This demonstrates a high level of correlation and suggests that there are limited diversification benefits to be had by investing in a fund that benchmarks itself against that index.
However, the four countries picked out by SooHai show a much lower correlation, each with a correlation coefficient of 0.52 or less to the FTSE All Share.
Correlation of markets to major indices
| Name | FTSE All Share | FTSE ASIA Pacific EX Japan |
|---|---|---|
| FTSE All Share | N/A |
0.76 |
| FTSE ASIA Pacific ex Japan Index |
0.76 | N/A |
| MSCI Indonesia | 0.45 | 0.66 |
| MSCI Malaysia | 0.41 | 0.67 |
| MSCI Philippines | 0.45 | 0.70 |
| MSCI Thailand |
0.52 | 0.74 |
Source: FE Analytics
While the correlations to the FTSE Asia Pacific ex Japan index are higher, only the MSCI Thailand index displays a strong positive correlation, defined by FE Analytics as a figure of more than 0.7.
Samir Mehta, manager of the JOHCM Asia ex Japan fund, which has the mandate to invest across the entire region, says he is particularly keen on the ASEAN countries.
The manager is 5.5 percentage points overweight Thailand, 2.6 Indonesia and 3.6 Philippines.
"There’s a misconception that Asia is all about China," said Mehta.
"The south-east Asian, ASEAN countries are really interesting. The likes of the Philippines, Thailand and Malaysia have gone through a real renaissance in recent years."
"The Asia crisis in the late 1990s hit them all really badly, but the banks have worked hard to sort out their balance sheets, and the whole region has prospered."
Mehta remains underweight Malaysia, however, which has just undergone contentious elections that have finally seen the re-election of the governing coalition of the last 56 years.
SooHai says he was also underweight until recently, but has taken the opportunity provided by the conclusion of the elections to increase his weighting.
"In our view, political stability in Malaysia is positive for the wider ASEAN (Association of Southeast Asian Nations) region and we believe the election result should allow for a widening and deepening of the government’s economic reform programme," he said.
"The market’s reaction to the result has so far been positive, with the MSCI Malaysia Index rising by 8.2 per cent in US dollar terms since the election on 5 May."
"The wider MSCI South East Asia Index has also rallied, returning 3.6 per cent over the same period*."
"From an investment perspective, we have been relatively cautious on Malaysia in the Baring ASEAN Frontiers fund for some time, favouring investment opportunities elsewhere."
"We have, however, recently reduced our underweight position relative to the benchmark index and we will likely continue to add or initiate positions in domestic stocks where we believe performance has been hampered by the uncertainty leading into the elections."
"Longer-term, we are also encouraged by signs that the Malaysian economy is enjoying a stronger investment cycle similar to other large regional economies."
The manager says he expects ASEAN equities to continue to deliver attractive returns as an increasing number of global investors recognise its superior long-term growth prospects.
Many of the funds that offer investors access to this region are offshore and offer dollar share classes.
JP Morgan ASEAN Equity has made 73.49 per cent over three years in sterling terms, while Amundi Equity ASEAN has made 59.08 per cent.
FF ASEAN has made 56.51 per cent over that time and 98.28 per cent over five years.
All three funds have five FE Crowns.
