When it comes to emerging market investing in Asia, both China and India are on the top of investors' lists. Favorable demographics, improving infrastructure and rising incomes are the hallmarks for investment in the two BRIC nations. There's even a fund - The First Trust ISE Chindia Index (NYSE:FNI) - that hones in on these two countries. However, while the growth stories in China and India have been clearly documented and well underway, the prospects of their southeast neighbors may be better. For those looking for the "China's of the future", the 10-nation Association of Southeast Asian Nations (ASEAN) block of countries could be exactly what a portfolio needs.
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Turning The Spotlight On Southeast Asia
Often ignored, the ASEAN could be one of the real long-term winners in the emerging market space. Organized as a way to accelerate economic growth through free trade, the group originally included Indonesia, Malaysia, the Philippines, Singapore and Thailand. Brunei, Cambodia, Laos, Myanmar and Vietnam were added in later years. The free trade bloc seems to be working. The GDP for all of Southeast Asia is about the same size as India's, and the market cap for companies with the region is nearly $300 billion larger than that of Brazil's. Within two decades, it is estimated that the ASEAN will have a larger and younger population than Europe. That population is getting richer, as well. By 2015, economists expect the ASEAN region to have 300 million middle class citizens. This will continue to drive economic growth and increase consumer demand.
The ASEAN is also benefiting from its proximity and a healthy relationship with China. The group is seen as a source of cheap labor for many Chinese companies, and recently the two groups have joined forces to create the CAFTA, or China-ASEAN Free Trade Area. The two groups continue to strengthen ties, as China is working on a high-speed railway through Thailand, Malaysia and Singapore. China has also partnered with Malaysia to build the first Sino-Malaysian industrial park in southwestern Qinzhou. This relationship has further benefited from China's lust for commodities. The ASEAN is a large exporter of soft commodities, including palm oil, rice and rubber.
Foreign direct investment in the ASEAN is also growing quite rapidly. The United Nations Conference on Trade and Development (UNCTAD) showed an increase in global FDI flows to the ASEAN of $1.2 trillion in 2010. Analysts estimate that 2011 will see $1.3-1.5 trillion in FDI. In addition, Intra-ASEAN M&A deals hit a record in 2010 of $53.7 billion. Analysts expect M&A activity to increase as the trade bloc will allow companies to expand outside their home countries. Finally, the merger of the stock exchanges in Malaysia, Singapore, Thailand and the Philippines will increase corporate and FDI investment.
Adding the ASEAN
With plenty of opportunity for investors, the ASEAN region should be on their radars. However, popular emerging market funds like the iShares MSCI Emerging Markets (NYSE:EEM) only include 6-7% weightings towards the ASEAN region. The Global X FTSE ASEAN 40 ETF (NYSE:ASEA) can be used as a focused play on the top five nation's within the group. There are some individual picks, as well.
Singapore is the financial capital of the Far East, and represents a more developed nation with political stability. Investors who are worried about currency fluctuations within the region should take in the nation's currency policy. Singapore uses a managed float policy against a basket of trading partner's currencies. Investors can add the nation via the iShares MSCI Singapore Index ETF (NYSE:EWS) or even store their gold there via the ETFS Physical Asian Gold Shares Trust ETF (NYSE:AGOL).
Malaysia has found its niche as a major agricultural commodity producer. Palm oil, of which the nation is the world's largest producer, is a cheaper substitute for various other cooking oils. Aside from agriculture, the nation is a net exporter of crude oil and holds many deposits of copper and iron ore. Investors can play Malaysia's growth via the iShares MSCI Malaysia Index ETF (NYSE:EWM).
Finally, Investors wanting to play more of frontier Asia, Vietnam represents the potential of the region. Its proximity to China, combined with lower wage costs, make ideal as play for Chinese "off-shoring". The Market Vectors Vietnam ETF (NYSE:VNM) is the only pure play on the country.
The Bottom Line
Despite China and India getting most of the Asian emerging market attention, the opportunities for investors beyond their borders are great. The ASEAN group of nations offers many of the same growth dynamics, but is at an earlier stage of development. Adding the group via the Global X fund or individually through ETFs like the iShares MSCI Thailand ETF (NYSE:THD) are ideal long term portfolio choices. (Learn why it may be profitable to invest in beaten down stocks in Buy When There's Blood In The Streets.)
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