By Laurel Teo, CFA
Are you eyeing investments in Asia, but tired of the usual "China," "India" options? Tempted to investigate an exciting growth region somewhere south of the former and east of the latter?
The 10 countries that make up the Association of Southeast Asian Nations (ASEAN) are now moving towards economic integration. First announced more than 10 years ago, the ASEAN Economic Community (AEC) is due to be established by 2015.
With less than a year left to the official deadline, there's been a revival of interest in this potential unified market comprising a diverse mix of nascent frontier markets (Laos, Cambodia, and Myanmar), rising economies (Indonesia, the Philippines, and Vietnam), established markets (Thailand and Malaysia), and wealthier states (Brunei and Singapore). News media, research outfits, and even industry conferences are beginning to flirt with the theme.
A recent report by McKinsey (Understanding ASEAN: Seven things you need to know) highlights some key attractions of ASEAN as a collective market:
- Combined GDP of $2.4 trillion in 2013, making it the seventh-largest economy in the world if it were a country. Projected to be fourth largest by 2050.
- Population of 600 million, ahead of North America or the European Union. Labour force is third largest in the world, behind only China and India.
- Almost 60% of total growth since 1990 has been derived from productivity gains.
- ASEAN's five key members (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) together pulled in more foreign direct investments than China in 2013 ($128 billion vs $117 billion)
Those of us from the investment and financial industry may be drawn to a specific section of the AEC Blueprint focusing on capital markets. When implemented, the measures proposed will ensure that within ASEAN:
- Capital can move freely across borders.
- Issuers are free to raise capital anywhere.
- Investors can invest anywhere.
Theoretically, investors should be able to trade capital market products freely in any ASEAN market from a single access point, while capital market intermediaries should be able to provide services throughout the region, based on home country approval.
Too good to be true? Possibly. While the plans and priorities have been approved by the respective governments, the devil is always in the details - in this instance, the speed and extent of implementation.
There is a host of initiatives and actions outlined in the AEC Blueprint, divided into four broad areas, targeted to be phased in over eight years (2008 to 2015). However, the general consensus by observers and ASEAN watchers is that a full integration will not happen by the end of 2015.
That's not to say that progress hasn't been made.
To monitor the AEC process, ASEAN set up an AEC Scorecard, tracking implementation in four phases (2008-2009, 2010-2011, 2012-2013, and 2014-2015). Reports for the first two phases (2008-2011) have been published.
So far, ASEAN has scored best in terms of integrating the region into the global economy (namely creating free-trade agreements, or FTAs, between ASEAN and other major economies, e.g. China, India, Japan, Korea, Australia, and New Zealand). More than eight in 10 (85.7%) measures in this area targeted for the first two phases have been achieved.
However, when it comes to promoting a single market and production base, such as free flow of investment and freer flow of capital, only slightly under two-thirds (65.9%) of the targeted initiatives for this period (2008-2011) have been accomplished. The pace in this area has also slowed. Where almost all of the single-market initiatives in Phase 1 (93.8%) were on track, the pace had halved (49.1%) by the end of Phase 2.
What does this mean? While investors and business people should not hold their breath for full integration come 2015, they can and should expect pockets and even swathes of areas where capital, services, and goods begin to flow more freely. Those ASEAN members that are better prepared will kick-start the initiatives, with the circle widening as and when other member economies are ready to join.
This accretive approach is typical of ASEAN, going by historical precedents (not only of the AEC thus far, but also most other earlier cooperation efforts).
In the case of the AEC, a trading link allowing investors to connect to and trade on other exchanges in the region went "live" with just the Malaysia and Singapore bourses in September 2012; Thailand joined shortly after. Vietnam, Indonesia, and the Philippines have agreed to the scheme in principle, but delayed coming on board, pending technology upgrades and other practical concerns.
Likewise, the ASEAN funds passport scheme is scheduled to go live this year with three core members: Malaysia, Singapore, and Thailand. Known officially as the ASEAN Collective Investment Schemes (NYSE:CIS) Framework, it will allow fund managers operating in one market to offer CIS (typically mutual funds or unit trusts) directly to retail investors in the other two member markets. All members will adopt a set of common standards in areas such as qualifications, investment limits, and capital requirements for instance, to ensure that retail funds are managed based on industry best practices.
And even though it's just three markets to start with, the trio's combined assets under management (AUM) is still a sizeable chunk - $240 billion at the end of 2012 - sufficiently attractive to warrant the interest of the investment industry.
An internal projection by BNP Paribas Securities Services reckons that the AUM could reasonably grow between 33% (to $317 billion) and 70% (to $400 billion) over the next five years, depending on the impact of ASEAN passporting on funds growth.
The projection, discussed in a recent report in Asian Investor ("Exploring the Asean fund passport's potential"), further considers a scenario with Indonesia and the Philippines joining. This could expand AUM to $470 billion in the same period.
So even with partial integration, there are still benefits to be reaped. As BNP Paribas Securities Services Senior Executive Mostapha Tahiri put it in the report: "As Malaysia and Thailand are relatively closed fund markets, the passport gives local and global players immediate benefits from cross border distribution."
A potential stumbling block, however, could be the simple fact that outside of governments, a vast majority of the private sector remains unaware or unconvinced about the AEC and its merits, if any.
Consider this particularly telling episode at the inaugural ASEAN Economic Congress, a new conference organized earlier this year by Euromoney on the AEC.
A panelist threw out this question to the 400-plus delegates in the hall: "How many of you have seriously thought about what the AEC means to your business? Is anyone's company preparing for how business is going to change? Has anyone received any company training about the AEC?"
Not a single hand was raised. Clearly, people were either completely oblivious to the AEC, or completely skeptical that the AEC will make any difference, the panelist observed wryly.
A more scientific assessment in 2012 had indicated as much. The ASEAN Economic Community Business Survey polled 381 firms from nine of the 10 ASEAN countries and found that more than half (55%) were unaware of the AEC 2015. In contrast, more than two-thirds of the same sample knew about the ASEAN FTA with China. In fact, a consistently higher proportion was aware of other ASEAN free-trade agreements (with India, Korea, and Australia and New Zealand) compared to the AEC.
Based on responses to a number of other questions, the report by National University of Singapore economics don Albert Hu concluded:
"… what drives the business community's interest in AEC 2015 is the actual process of economic integration. We can infer from this that the lack of awareness of AEC 2015 in the business community can be attributed to the lack of actual economic integration."
A 2013 Deutsche Bank report on the AEC came to a similar view. "Thus far, the public impression of AEC is that it is driven by the government sector, which needs to be corrected …. AEC success depends crucially on private-sector involvement and public support. In this regard, greater efforts should be made to raise awareness of AEC among the business community to bring it on board," it said.
Indeed, implementation does not equal integration. The ASEAN governments can only open doors, clear trade barriers, and prepare the infrastructure. This would only be an empty frame, however, without the private sector's buy-in and involvement.
The next step for ASEAN governments thus would be to pitch, nay evangelise, the vision. Any takers?
Disclaimer: Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.