Freshly rebranded Singapore fund house SEA Asset Management is targeting growth stocks and high-yield bonds in Asean countries for two new Sicav funds it is marketing to private clients and institutions in the Lion City.
The firm is focusing on what it sees as the region’s huge economic potential in terms of GDP growth and an expected big jump in the size of the middle class.
The funds gained authorisation from the Monetary Authority of Singapore last week for sale to accredited investors. SEA is now looking for private banks and financial advisers as distribution partners and is considering registration in Hong Kong and other Asian centres.
SEA hopes to secure small local private banks as distribution partners and is in talks with financial advisory platform iFast in Singapore, said chief executive Alexander Zeeh. It will share 50% of its management fees with these channels, he added.
Both the equity and bonds funds are managed by Gallen Tay, chief investment officer at SEA AM, which has $50 million in AUM and was founded in 2007 as Copar Finance Asset Management.
“We believe value has emerged in small- and mid-cap Southeast Asian equities,” said Zeeh. Part of the growth story comes from the fact that Asean excluding Brunei and Singapore is catching up from a very low base of per-capita income – aside from Malaysia, where growth is more stagnant.
Moreover, growth projections for Southeast Asian emerging economies exceed those for many countries with the same income per capita, noted Zeeh.
Asean is the US’s third-largest Asian trading partner and the top Asian destination for both European and US investment. The 10 member states – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – have a combined population of 600 million and a GDP similar to the UK’s.
But the Asian Development Bank predicts that by 2030 Asean will eclipse Japan as the fourth largest economic bloc market after the EU, US, and China. It also forecasts that the size of the middle class in Southeast Asia will rise from 24% of the population in 2010 to 65% in 2030.
Southeast Asian markets are certainly seen as cheap right now, but where will earnings momentum come from?
Various Asean economies have launched stimulus programmes to boost economic growth, Zeeh told AsianInvestor. "For example, Thailand is spending on infrastructure and the rural economy, while Indonesia has had several rounds of measures which will benefit the broader economy and generate stronger earnings growth.
“In the near term, selected sectors will continue to do well, including clean and renewable energy, e-commerce and logistics, infrastructure and inbound tourism, especially from China,” added Zeeh. He pointed to countries such as Philippines and Vietnam seeing economic growth of 6% or more, suggesting that corporates in those markets should continue to enjoy strong earnings.
Meanwhile Asean high-yield bonds continue to provide attractive returns, due to lower average default rates and lower balance-sheet leverage than European or US high yield. “The short duration is the reason behind their low volatility,” said Zeeh. The SEA high-yield fund does not buy high-yield bonds of longer duration than two years.
Challenges to integration
A major obstacle to Asean integration, however, is the multitude of political, cultural and economic differences among the region’s countries. They included three constitutional monarchies, two communist states, three republics, a sultanate and a former military junta. Annual per-capita GDP ranges from more than $40,000 in Singapore and Brunei to less than $1,000 in Cambodia and Myanmar.
“Economic integration for Asean is an ambitious goal. It is challenging, although not completely impossible,” said Agatha Lee, head of Asia-Pacific trade sales at JP Morgan. There are many hurdles to overcome, she added, from restrictive currency regulation in economies such as Malaysia and Vietnam to political worries in Thailand, all of which are concerns for investors.