|The Top Five Southeast Asia Investment Trends for 2013|
JAN 15, 2013 11:35 AM
All of these trends play out against a backdrop of unrest in MENA, a weakening petrodollar system, and a worldwide currency war -- and they present opportunities for investors.
It is the beginning of a new calendar year and with it come the inevitable (and interminable) lists of ideas which will mark why this year will be different than the last one. The very act of creating yet another Top 10 List serves as an ironic reminder of the one constant of what we as investors, traders, and advisors have to plan for every year, which is change itself.
For US investors interested in Southeast Asia, here are a few ideas that should help you navigate a lot of the noise that will attempt to confuse you in the coming 12 months.
1. The Emerging Yuan Bloc
The major economies of ASEAN – Thailand, Malaysia, Singapore, Indonesia, the Philippines – ended 2012 with very strong currency correlation to the Chinese yuan and not the US dollar. As the region becomes more tightly economically integrated this relationship will grow, especially in light of how aggressively China is pursuing gold and silver accumulation. Malaysia’s ringgit, in particular, is moving practically in lockstep with the yuan, and since Malaysia has tied its economic future to China’s, maintaining the exchange rate between them is an imperative.
2. Singapore’s Rising Property Values
Capital is flowing into Singapore so rapidly that, despite a number of regulations from the relatively laissez-faire Monetary Authority of Singapore (MAS), property values continue to rise. S-REITS were among the best asset classes in the world in 2012, returning more than 37% in reports from September. The latest news out of Singapore has the MAS putting more controls on to force higher lending standards, but they have been ineffective in the face of near-zero-percent interest rates, as the MAS apes the Federal Reserve’s interest rate policy and manages the Singapore dollar’s exchange rates through other means. The MAS will be under increasing pressure, especially with strong US dollar devaluation, to decouple its lending rate from the Fed’s benchmark rate as real rates are still more negative than in the US since Singapore’s CPI is higher, running now at around 4%, which is a huge incentive to bid up interest rate sensitive projects like real estate.
3. Coal and Iron to Drive Infrastructure Build-Out
Last year thermal coal and iron ore prices dropped by more than 30% due to the GDP slowdown in China, which accounts for a huge (40+%) proportion of global demand for these resources. Nominal dollar prices of these commodities could rise in 2013 but local SE Asian prices, due to stronger relative currencies, will keep the effective prices flat to negative. This will allow ASEAN to more affordably build out the road, rail and port infrastructure around the Greater Mekong Sub-Region – Myanmar, Cambodia, Northern Thailand, Laos, Vietnam. High oil prices are pushing state energy companies like PTT plc (PINK:PEXNY) and PLN in Indonesia to develop electricity plants using coal. Malaysia, as well, is looking to expand electricity generation from coal to 50% by 2020 compared to the 33% today, which includes energy-hungry Malaysia’s energy usage to grow annually between 3-5%. The PowerShares Global Coal Portfolio ETF (NASDAQ:PKOL) is heavily invested in Asian coal companies such as Indonesia’s Bumi Resources (PINK:PBMRY), Banpu (PINK:BAPUF) as well as China’s major coal producers like China Shenhua Resources (PINK:CSUAY).
4. Increased Demand for LNG
The needs for liquefied natural gas (LNG) imports into Southeast Asia continue to rise. Both the US and Canada are preparing huge LNG export terminals along the Gulf Coast – Cheniere Energy Partners LP (NYSEAMEX:CQP) will have one finished by 2015 – and in Kitimat, British Columbia, three different projects are in some form of planning/production and LNG will begin to flow eastward by 2016. This year Malaysia’s newest LNG import terminal is due to receive its first shipments. Indonesia, facing falling output from its aging fields, is looking to convert export terminals into import terminals. The latest data from Platt’s has LNG trading at $15.63 per 1 million BTU versus ~$3.50 in the U.S. That price is down 9% year-over-year, but still allows for an extremely high arbitrage over North American production costs, which will drive the development of multi-billion import and export terminals around the globe. The development of Myanmar will be tied directly to its vast natural gas reserves and their impact on helping keep energy costs contained. I continue to be impressed with Keppel (PINK:KPELY), especially its recent deals with Pemex in Mexico and Golar (NASDAQ:GLNG) in Norway, as the world’s leading offshore oil and gas rig builder.
5. Potential for Political Change
The fighting in the southern peninsular states of Thailand continues to escalate. The secessionist movement between Muslims and ethnic Maylays in the region has reached a point where recently Malaysia has offered to step in and act as mediator. Thailand is a political powder keg held in check by the love and respect for King Bhumibol Adulyadej who is 85 years old. Deference to him keeps much of the suppressed anger in Thailand at bay, which could quickly erode when he dies.
In Malaysia, the 14th elections will happen before June of this year, and with the ruling Barisan Nasionale coalition and embattled Prime Minister Naijib facing his first real election, there is the distinct possibility of a change at the top of Malaysian politics since the country gained independence in 1957. United Malays National Organization (UNMO) has ruled Malaysia for more than 55 years and the opposition led by Anwar Ibrahim, which already controls the most populous state of Selangor, has a real chance to win a majority in Malaysia’s parliament. The effects of this potential change have prompted a number of free-speech reforms as well as massive infrastructure spending and privatization of state-owned enterprises in 2012, including the $3.3 billion Felda Global Ventures (PINK:FAGVF). That trend is likely to continue into the first part of 2013.
All of these trends play out against a backdrop of unrest in MENA; a weakening petrodollar system as China and Singapore continue to open up markets for gold, silver, and oil trading not exclusively settled in US dollars; and a worldwide currency war. These themes present opportunities for investors who want to gain exposure to Southeast Asia.
No positions in stocks mentioned.