Southeast Asian stock markets have outpaced most global bourses this year and investors are convinced rapid population growth, sound fiscal policies, and easier credit will boost corporate profits. Institutional asset managers are more upbeat about the region than any other part of the world.
Vietnamese and Philippine stocks have enjoyed double-digit gains so far this year with solid advances for Thai and Indonesian ETFs. Emerging markets overall have lost 5.4% while foreign developed markets added 4.40%.
The rapidly growing and predominately young Southeast Asian populations are in their working and spending prime. The Philippines, with one of the world's highest birth rates of 3.14 children for every woman, is expected to more than double its population from 2000 to 2050. IShares MSCI Philippines Investable Market Index Fund (EPHE) rallied 48% in 2012, leading all global markets. It has advanced 12.53% year to date.
Indonesia and Vietnam's populations are forecast to grow 46% and 40%, respectively, over the same 50-year stretch. Singapore is an ASEAN exception with one of the world's lowest birth rates.
The region also enjoys very low unemployment rates. Thailand's is a mere 0.48%. The Philippines, with the highest regional rate at 6.8%, still trumps the U.S.' 7.7% and Europe's 11.9%. With rapidly aging populations, the U.S. and Europe have fewer workers supporting retirees.
West Chester Capital Advisors in West Chester, Pa., bought a $1.09 million stake in Market Vectors Indonesia ETF (IDX), in the fourth quarter as a bet on the country's growing middle class, natural resources and pro-business government. The ETF has climbed 7.12% year to date.
"Indonesia is like what the U.S. was over 100 years ago in terms of the needs of the population," said Bruce Marra, CEO, whose firm has $151 million invested in stocks and ETFs. His firm also owns a $960,000 position in iShares MSCI Malaysia (EWM) for the same reasons. He believes corruption in these countries will fade as they mature.
People living in rural areas are increasingly migrating to urban areas and as incomes rise, consumer spending will increase, says Neen Mishra, ETF research director at Zacks Investment Research in Chicago.
With sales driven by consumer spending, Southeast Asia is less export dependent than China, Korea, India and Taiwan.
"ASEAN markets tend to have a greater exposure to banks, utilities, consumer and telcos," said Khiem Do, an investment strategist at Baring Asset Management in Hong Kong, in an email. "They do not have a big exposure to cyclical global-trade-orientated industries such as electronics, autos, chemicals, steel and shipbuilding.
Since the 2008 global financial crisis, ultralow interest rates in developed countries have let ASEAN countries borrow cheaply to build infrastructure to modernize and urbanize, Do added.
Medical tourism is a key growth health care driver in the region. About 2 million foreign patients sought treatment in Thailand in 2011, a 170% jump over 2004, according to The Conrad Group, a Miami-based business consulting firm specializing in emerging markets.
"By 2017, 15.5 million people are expected to travel to SE Asia annually for medical procedures with a total spend exceeding $30.3 billion per year," William Nobrega, managing partner of Conrad Group, said in an email.
In 2011, Bumrungrad hospital in Bangkok treated 420,000 foreign patients.
IShares MSCI Thailand Index Fund (THD) returned 40% last year and 6.00% year to date.
Government-run health insurance dominates in most Southeast Asian countries but Conrad believes the private health insurance market will expand.
Foreigners are also flocking to Southeast Asia to retire to take advantage of substantially lower living costs. There are 100,000 foreign retirees in SE Asia. Conrad expects 500,000 by 2020. Developers are building retirement communities in Philippines, Thailand and Malaysia.
Thanks to lessons learned from the 1997 financial crisis, Southeast Asian governments hold low debt-to-GDP ratios, from 25% in Indonesia to 42% in Thailand.
Companies in the MSCI Thailand index will grow earnings by 20% this year and 11% next year, Goldman Sachs forecasts.
Indonesia is expected to grow earnings by 17.6% and 16.2% in 2013 and 2014, respectively.
Vietnam is seen growing annual earnings 11% over the next five years, according to Morningstar.
But after such strong run-ups, valuations may be too high. The Philippines market trades at 20 times forward earnings vs. its historical five-year average in the mid teens and 12 for Asia, according to Goldman Sachs.
Indonesia has a price-to-earnings ratio of nearly 15, which is on the high end of its historical range between 10 and 15.
Investment inflows into mutual funds targeting Vietnam totaled about $194 million in the year ending March 13, marking a threefold increase over the year-ago period, according to EPFR Global. Inflows into Philippines and Singapore mutual funds spiked 250% and 110%. But inflows into Indonesia fell 12%.
Low rates and weak economies in developed countries drove foreign inflows in recent years into Southeast Asia bond markets. But that's a double-edged sword for nations with higher growth and appreciating currencies, the Asian Development Bank has warned. While it lets companies and governments develop with cheap financing, it could excessively inflate asset prices that could crash once foreigners tighten the spigots. Foreigners own about a third of government debt in Indonesia and Malaysia.
Southeast Asia also faces corruption, fraud, lack of regulatory transparency, poor infrastructure, irregular oversight, high inflation and political infighting.