“I can’t believe I still have to do this”, says my old friend who manages a successful retail outlet in downtown Bangkok. He looks troubled. This is an experienced and competent man, but once a day he is reduced to the status of a little boy. After closing up the shop, he slowly climbs the stairs to bring the daily proceeds from the cash registers for his ailing mother to count and review. And he knows that as long as she is alive, nothing will change.
In a traditional Asian family business, it’s the person who acts as the cashier who is the boss. And they usually keep their cards pretty close to their chest.
In my experience, that's true for big and small businesses alike. Because Southeast Asia is not like the UK. You enjoy a free and open exchange of ideas. In this part of the world, information is more fragmented. Business tycoons tend not to court the media. And businesses prefer to operate beyond the glare of public scrutiny. Even people in the financial industry are guarded about sharing their views on stocks.
But something interesting has happened in the last few years. As Southeast Asia emerges as an economic power, these Old World values are changing. Increasingly, companies are realising the benefits of opening their books, and companies are queuing up to list on local stock exchanges. Last year, two of the world’s biggest initial public offerings (IPOs) came from the Association of Southeast Asian Nations (ASEAN).
There are very good reasons for this. In fact, I think a flood of money will be invested in these economies in the next year. And today I’d like to show you how you can profit.
Three reasons why stock exchanges will thrive
Today I want to talk stock exchanges. Because they are a great play on the drive to go public in Southeast Asia.
The way I see it, there are three reasons why stock exchanges are thriving right now.
Firstly, companies in Southeast Asia are flourishing because their economy is flourishing. The MSCI Southeast Asia index was up 18.96% against a 5.84% rise in the FTSE 100 in 2012. And that is attracting a lot more investors to this part of the world.
CIMB, one of the leading banking groups in ASEAN, announced last week that CIMB Securities Thailand would open six new branches in Thailand, bringing the total number to 26. Malayan Bank (Maybank), ASEAN’s fourth-largest bank by assets, has also just announced that it plans to spend $100m in its Philippine unit as it aims to quadruple its network over the next five years.
That is feeding the number of initial public offerings and capital risings we are seeing in Southeast Asia. The outlook is promising. For instance, in Thailand the operator of Bangkok’s sky train system, BTS Group Holdings PCL, plans to raise at least $1.5bn through the flotation of an infrastructure fund. The biggest-ever IPO in Thailand on record was Thai Oil PCL's $784m listing in 2004, according to Dealogic. And in Malaysia, Malakoff is seeking to raise $1bn in the second quarter.
Secondly, there is a restructuring boom happening right now across the ASEAN region. And this should feed into the pipeline of companies looking to list.
This restructuring boom is being fuelled by cheap credit, low corporate gearing and the radical integration across the ASEAN region. In fact, I see this boom as the third instalment in the Asia story. The first was Asia reaching out to the modern global economy in the 1980-90s. The second was the export and China driven boom of the 2000s. Now we are seeing a restructuring boom. And this is a powerful story.
I believe that this restructuring boom will allow Asian companies to reduce their dependence on the indebted West. No doubt the Asian markets will love it. At least, investors did when America had a similar mergers and aquisitions (M&A) boom from the late 1980s to 2001.
Thailand is the best example. According to BoA Merrill Lynch, the total transaction value of Thai M&As announced this year is $24.6bn, almost twice the previous record of $13.3bn (2010) and eight times larger than in any year prior to the global financial crisis in 2008.
And there is a ‘roadmap’ for further integration of stock exchanges across this region. One positive development is the creation of the ‘ASEAN Exchanges’, a deal struck between seven bourses in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, which operates two stock exchanges in Hanoi and Ho Chi Minh City.
This integration of the region’s capital markets is expected to be completed by 2015, where the goal is to make ASEAN an accessible asset class for the public. It is a new era for Asia capital markets and one which is expected to attract a lot more IPOs and a lot of interest among local and foreign investors. My friend in the retail shop in Bangkok is certainly doing his best to put money aside for his investments. I think you should do the same. That's why I've been writing to you about this region so much in recent months. We've seen how foreign governments are rushing to invest in this region. And we've seen now the ASEAN countries are investing billions to develop their own economies. And believe there are some great ways for British investors to get in on this story.
Take the thriving stock exchanges that we have talked about today. I think there are at least two that look very interesting...
If you've enjoyed what you've read so far, I've got something you'll definitely be interested in.
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Easy money will fuel these stock markets
Finally, I see a huge influx of money into this region over the next few years. The current record low level of interest rates combined with loose monetary policies provided by central banks offer a bullish backdrop for asset prices across the world.
This is unlikely to change any time soon. Indeed last week, the Bank of Japan (BoJ) agreed to double its inflation target to 2% and ease monetary policy, meeting key demands of Japan's new government. BoJ said that starting it would buy about ¥13trn ($145bn) in assets each month starting in January 2014. It added that this would continue for as long as was necessary. The plan is similar to measures announced by the US Federal Reserve (FED) in December, which have committed to keep interests low until unemployment remained above 6.5%.
And so a major asset allocation shift is on the horizon. Most of the money since the financial crisis in 2008 has moved into bonds and credits, which now are trading at unprecedented levels. When risks such as the European sovereign debt crisis recede, money will flow into assets with potentially higher returns such as properties and equities. And this region, Southeast Asia, offers truly great returns over the medium term. It’s a story that I think every British investor should take an interest in.
So which exchanges should you take a look at?
Two exchanges that look interesting
It is essential to note the difference between stock exchanges in the West and Asia. Western exchanges are trading venues with no clearing, meaning that they have lost market share due to competition from alternative exchanges. In Asia, listed exchanges such as Bursa Malaysia (BURSA), Hong Kong Exchange (HKE) and Singapore Stock Exchange (SGX) are integrated exchanges, with clearing and trading combined, allowing higher barriers to entry. These are quasi monopolists which explains their relative hefty price/earnings (p/e) multiples (see below).
I think two of the exchanges look interesting at the moment.
Bursa Malaysia Bhd is a fully integrated exchange, offering a wide range of exchange-related services, including trading, clearing, settlement, and depository services. The exchange also offers information services related to the Malaysian securities market.
Bursa revealed recently it would set up exchange-traded bonds, which will allow retail investors to fund Kuala Lumpur’s new subway. DanaInfra Nasional Bhd, the state-owned company that’s financing the rail network, is kicking off the offerings and plans to complete the sale of Islamic bonds by 8 February. The notes will pay a minimum profit rate of 3.7%, depending on demand and market interest, it said.
Bursa trades on a p/e ratio of 23 times 2013 profits and a dividend yield of 4.0%, according to Bloomberg data. Over the last five years the stock has been trading between RM4.40 to RM13.40, which suggest that current share price of RM6.57 is closer to its lower level.
Singapore Exchange Limited owns and operates Singapore's securities and derivatives exchange and their related clearing houses. The company also provides ancillary securities processing and information technology services to participants in the financial sector.
SGX trades on a p/e of 25.6 times 2013 profits and a dividend yield of 3.5% according to Bloomberg data. Over the last five years, the stock has been trading between S$4.02 to S$10.24, against current share price of S$7.70. It’s worth checking out both.
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