2011 Feb 18
February 18, 2011

Asean bigger than the sum of its parts?

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Those who think the Asean countries are emerging as a new asset class, albeit slowly, got a bit of support this week with the launch of the first US listed exchange-traded fund focused on the 10-country region.

It’s a bit soon to say anything conclusive – the Global X FTSE ASEAN 40 ETF rose on its first day of trading in New York on Thursday, but only by 0.3 per cent, which hardly suggests a torrent of pent-up demand.

Still, it’s clearly a moment for followers of the Association of South East Asian Nations, and a comparison with the only well-known similar product – the CIMB FTSE Asean 40 ETF, listed in Singapore – suggests that the longer term prospects may be reasonably healthy.

The CIMB product is up 72.3 per cent since its launch in 2006, compared with 60.2 per cent for the FTSE index of the 40 biggest Asean stocks, on which both ETFs are based.

Still, this seems an odd time for the launch of the US ETF, given that the FTSE Asean index is down 1.64 per cent for the year to date, in part reflecting significant withdrawals of funds from emerging markets by US and European fund managers.

Some of these are the very investors cited as a driving force for the US listing by Bruno del Ama, Global X chief executive, who says the ETF was driven “in part by institutional investors in the US who remain keen about getting into the region at current valuations”.

It’s certainly true that there is a lot going on Asean, which groups Singapore, Malaysia, Indonesia, the Philippines, Thailand, Vietnam, Cambodia, Laos, Burma and Brunei Darussalam.

M&A activity is surging – especially across the region’s internal borders – bilateral trade agreements are piling up with China, India, Australia and other countries, and significant progress towards integration has been made within the grouping on both merchandise trade and services such as civil aviation.

A group of securities exchanges led by Singapore, Kuala Lumpur and Bangkok is also aiming to launch cross border electronic trading by the end of this year – a move that could eventually lead to a common platform for stocks capitalised at $1,750bn (according to the World Federation of Stock Exchanges). That is more than either India or Brazil can boast.

Some senior financial markets players in the region think its profile is rising quite fast as a result of these developments, combined with rapid economic growth (7.5 per cent last year, according to the Asian Development Bank). Mayooran Elalingam, head of mergers & acquisitions for South East Asia at Deutsche Bank, says people “are talking about southeast Asia as a region rather than a collection of countries, which is quite new”.

However, there are some very clear downside issues for the region to grapple with if it is to be seen as more of coherent unit. Attempts to deepen and co-ordinate local bond markets appear to be moving at glacial pace, for example, and in spite of the smiles at Asean’s twice yearly summits there are still significant political tensions between, some member states – notably Singapore and Malaysia, Indonesia and Malaysia, Thailand and Cambodia, and Burma and most of the others.

In spite of these tensions, almost everyone in the financial sector thinks the countries in the region will continue to grow pretty quickly. But that doesn’t necessarily mean a higher profile for the region as a unit.

“I am still a huge fan for Asean as a theme,” says Tai Hui, a senior economist at Standard Chartered bank. “However, … interest is not so much linked to Asean as a unit, but rather still attached to its members.”

On this view, says Hui, Singapore is an international leader in business and financial services, Indonesia is a growing consumer, infrastructure and commodity story, while Thailand and Malaysia are actively looking to reinvent themselves under the rising competitive pressure from China and other manufacturing bases.

In spite of the caveats, it’s clear that plenty of attention is being focused on the Asean region. What is not yet clear how that will play out. Watching the Asean ETFs will be one way to keep a running check. –Kevin Brown, http://blogs.ft.com/beyond-brics/2011/02/18/asean-greater-than-the-sum-of-its-parts/#axzz1SWrRS1w7