2011 Jul 16
July 16, 2011

Asean as an asset class

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GOVERNANCE MATTERS by SHIREEN MIHIUDEEN.

IN January 2007, the 10 member countries of Asean agreed to establish the Asean Economic Community (AEC) by 2015. However, few details have been revealed on the efforts to transform the association into an economically, and not just politically, significant bloc.

Essentially, the AEC is meant to allow the freer movement of goods, services, skilled labour and capital within South-East Asia. In other words, Asean is trying to set up a single market. We think this is necessary because if you look at this bloc as an asset class, it is a compelling investment opportunity. The Organisation for Economic Cooperation and Development (OECD), for one, considers South-East Asia “a region of strategic importance” to developed countries.

More soberingly, a single market is the only way Asean will be able to hold its own economically against the might of the United States, the European Union and, increasingly, China and India.

An idea like the AEC would once have been considered unthinkable, particularly in the wake of the 1997 Asian financial crisis, which erupted in Thailand, a founding member of Asean, and which sent shockwaves throughout Asia. But when the US credit bubble burst in late 2008 and set off another global financial crisis, Asean economies clawed their way back to a V-shaped recovery that underscored just how much the bloc had improved on its macroeconomic and financial policies since 1997.

Asean’s attractiveness to investors grows when you consider that the region is relatively stable and, better yet, has a relatively young consumer base. So it has a lot going for it, including having major agricultural commodity producers; five financial centres in the Global Financial Centre Index (which measures the world’s 75 top financial centres); a number of world-class companies with strong earnings growth; and, last but not least, a strong regulatory environment that is investor-friendly. It is also a hub for a wide range of merger and acquisition activities that offer investors many opportunities in frontier economies and markets.

For better balance, Asean has of course to, among others, improve on its fiscal policy framework to be in line with the medium-term policy goals of the national development plans of its respective members. We also appreciate that any move towards establishing a common Asean currency is radical and, frankly, decades away from being realised. The world, however, is likely to see Asean making continued efforts to link its bourses, liberalise intra-and inter-regional capital flows and permit banks in one member country operate in all, or at least most, other member countries.

To be sure, Asean has its work cut out for it in trying to bring about the AEC. For starters, it will have to scrutinise the finer details of listing rules in its members’ bourses as well as legal requirements for companies that affect the investment strategies of regional fund managers. As an example, we reviewed recently treasury stocks and their uses in three Asean countries, namely Malaysia, Singapore and Indonesia. Our interest in this subject was piqued when an Indonesian public-listed company (PLC) transferred its treasury stocks to a Singapore nominee company to use those as currency for an acquisition. The very news of such a transfer was in itself unusual, to say the least.

That had us burrowing into precedents and reviewing the rules that regulate treasury stocks in Indonesia, Singapore and Malaysia. We learnt that there are provisions that suspend the voting rights of those holding treasury stocks. This was a huge relief to us as these provisions are something positive because they favour good corporate governance and so are aligned with the general trend globally, which is either to eliminate treasury stocks altogether or not allow shareholders using treasury stocks to vote in support of management at annual general meetings.

In the process of discovering that, we also found some differences in the laws of the three jurisdictions, which are as follows:

● Singapore is far more flexible about how treasury stocks may be used, including allowing such stocks to be transferred as payment, or what the law calls consideration, for acquiring shares or assets of a company or person;

● Indonesia limits the period during which companies may hold treasury stocks. It also provides that rules on such stocks may be relaxed if the Indonesian market is in potential crisis; and

● Malaysia’s approach to treasury stocks is plain vanilla, allowing companies merely to cancel, retain or re-sell such stocks as well as distribute the stocks as share dividends.

From an investor’s perspective, Asean’s market regulators need to go through such differences in member jurisdictions as soon as possible, so as to streamline the fiscal framework and smoothen market integration initiatives. It should do so by drawing up a clear road map with set milestones. This would show potential investors that Asean has a systematic approach to establishing a single market.

Conversely, investors and their fund managers would run for cover and red-flag Asean as an “avoid” region if they get wind of cases such as companies transferring treasury stock from one Asean country to another just for an acquisition.

From a listing perspective, potential market entrants may choose to list in jurisdictions that have far more flexible laws for dealing with complex corporate scenarios.

Asean’s huge investment potential is often overlooked, which is a pity as it has all that it takes to be a real long-term winner in the emerging market scene. But it would certainly simplify trading across Asean markets for fund managers if the bloc’s regulatory investment framework were more homogenous among its member countries.

● Shireen Muhiudeen is managing director of Corston-Smith Asset Management in Malaysia, a fund management company that makes investment decisions based on corporate governance.