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Tensions in Vietnam and beyond will hurt growth in Southeast Asia

Surbhi Jain

Investing in Southeast Asia amid rising China-Vietnam tensions (Part 5 of 6)

(Continued from Part 4)

The impact of the conflict

The chart below shows the economic outlook for real gross domestic product (or GDP) growth in the Southeast Asia, China, and India, as published by the Organization for Economic Cooperation and Development (or OECD).

The state of the economy in emerging Asia also reflects in the performance of emerging market exchange-traded funds (or ETFs) like the Global X FTSE ASEAN 40 ETF (ASEA), which tracks the performance of the 40 largest companies in the five ASEAN regions (Indonesia, Philippines, Singapore, Malaysia and Thailand), and the iShares MSCI Emerging Markets ETF (EEM).

According to the UN World Economic Situation and Prospects (or WESP) 2014 mid-year update, the global economy is expected to strengthen over the next two years despite a downgrade of growth prospects for some developing economies and economies in transition. However, global growth has been revised slightly lower from the forecasts presented in the WESP.

Global tensions

The report’s downward revision in growth projections mainly reflects deteriorating situations in several emerging economies due to different challenging economic and political conditions. Geopolitical tensions, such as those afflicting Ukraine and not Vietnam, have caused an even more pronounced downward revisions for economies in transition.

While the rising geopolitical tensions are creating much market volatility, they’re also creating problems for multinationals that rely on these countries for manufacturing. The Vietnamese textile and apparel industry’s customers include the top labels worldwide, such as U.S. brands JC Penney (JCP), Nike Inc. (NKE), and Gap Inc. (GPS).

Considering the rising downsides to economic growth amid the rising China-Vietnam conflicts in the South China Sea as well as the political tensions in Thailand, investment opportunity in Southeast Asia could be dampened.

In Thailand, one of Southeast Asia’s most promising economies is once again tearing itself apart through destructive political struggles. Anti-government protests have recently resulted in the judicial ouster of Prime Minister Yingluck Shinawatra.

Moreover, with the political thrones in Indonesia and India turning in favor of opposition candidates, we’re left in doubt—as well as hope—about the growth direction these economies could take under their new governments. Investors are hopeful that the new regimes will enact the type of pro-investment reforms that incumbents have neglected.

A change in government in India has certainly set the stage for the controversial but business-friendly Narendra Modi—who, as head of state of Gujarat, has succeeded in luring investment and streamlining bureaucracy. Modi took oath as the prime minister of India on May 26. The Indian stock markets have surged in recent weeks along with Modi’s victory. For more on the change in government in India, read the Market Realist series Must-know: Will India’s new government affect your portfolio?

The next part of this series shows how the current uprising in the South China Sea is impacting markets.

Continue to Part 6

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