Singapore is a special place for me. This small city with few natural resources has managed to overcome obstacles to achieve a high degree of economic success. This year is special as it marks the 20th anniversary since we opened Franklin Templeton’s Singapore office. To celebrate this milestone, we chose Singapore to host this year’s first semi-annual EM Analyst conference.
To share the Singapore perspective, I asked Dennis Lim, Co-CEO of Templeton Asset Management, Ltd. and one of the pioneers who started the Singapore office with me 20 years ago, to be my guest blogger to share his insights and analysis on the changes and challenges in Singapore and across Southeast Asia.
Our analyst conferences are high-energy events and this one was no exception. We had more than 50 analysts from our offices around the globe gathered in a single meeting room, sharing opinions on companies and discussing global events. Watching them debate investment ideas and discuss trends from the different markets and sectors made me realize how large our EM team has grown from the days when Mark started the group. “Analyst meetings” used to be very regular affairs. The original team of Mark, Tom Wu, Allan Lam and I used to travel together quite frequently so we were talking on a daily basis.It’s been two decades since we opened the Singapore office. I have seen the city survive many setbacks; growing, maturing and reinventing itself and developing into the economic hub it is today.
Since its early beginnings, Singapore’s history combined the rise and fall of the Malay empires, the exchange of European colonial powers and the highs and lows of nation-building.
The city sits at the southern tip of the Malay Peninsula, and acts as a gateway into Southeast Asia. The city hasn’t forgotten its early roots as an entrepôt, where international traders buy, sell and barter goods and services. It has developed into a center for construction and financial services as well as for trading manufactured goods. Today, government and business leaders aspire to further develop the city into a global seat for gold and carbon trading as well.
Singapore also has one of the more well-established capital markets in the Asia-Pacific. The Singapore Exchange is the preferred listing location for close to 800 global companies,1 and since some frontier market companies are listed there, it is a conduit through which we can access companies in those markets. Adding to this, some Singapore-listed companies offer opportunities for us to access budding new markets like Vietnam and Cambodia.
Investing in Singapore, though, comes with its own set of challenges. Its domestic market is small and the economy is a very open one as it doesn’t restrict trade, development and capital flows with other countries. This means that Singapore is more closely linked to the movements of the global markets and affected by global market volatility like the global financial crisis and the challenges from the Eurozone.
Looking beyond Singapore, the Southeast Asian nation of Indonesia is one of the countries that was forced to endure past challenges such as the Asian financial crisis, SARS outbreak and ripple effects of the 2011 tsunami in Japan. Despite these challenges, Indonesia rebounded each time. I do think that more needs to be done in this country where street protests are rampant, but the progress the country has made in the past 20 years is nothing short of remarkable.
With access to natural resources such as timber and coal, Indonesia has potential to benefit from increasing global demand for commodities, mainly due to rising infrastructure development in many emerging markets which see a continued demand for hard commodities.
When the 1997-1998 Asian financial crisis struck, the Indonesian government responded by taking control of a portion of private sector assets through the acquisition of non-performing loans, and executed a debt restructuring process. The results are a more transparent and open economy, and improved corporate governance in Indonesia.
Like Indonesia, Thailand has faced its share of economic challenges and political instability. Thailand was dealt an additional blow from Mother Nature last year in the form of the worst flooding in decades. Despite its challenges, we consider Thailand’s long-term fundamentals to be positive and the economic recovery to be sound. Drivers for Thailand’s economic growth include the country’s agricultural resources—including offshore gas reserves—and a successful tourism industry. For value investors like us, current valuations in Thailand generally remain attractive, though the potential growth obstacles do bear ongoing scrutiny.
We also see potential opportunities for growth in the frontier markets in Southeast Asia. Myanmar, for example, is rich in oil, gas and all sorts of minerals. Such resources are positive, of course, but the country is not without its areas of concern. Weaknesses we’re especially mindful of in Myanmar are lack of a proper legal structure, the lack of a well-developed banking system, and the lack of solid foreign exchange operations.
Cambodia, being ideally located to take advantage of cross-trade opportunities with Thailand, Vietnam and Laos, presents other interesting Southeast Asian frontier market investment possibilities. And of course Cambodia’s tourism industry has been strong in recent years. It isn’t all positive, though, and in Cambodia I would caution potential investors to monitor corporate governance standards to ensure investors are treated fairly.
Bottom line: the numbers for Southeast Asia are hard to argue with. The latest estimates from the International Monetary Fund project developed economies as a whole to achieve GDP growth of only 1.2% in 2012 and 1.9% in 2013.2 In contrast, Southeast Asia as a whole is expected to post an estimated GDP growth of 5.8% this year and 7.1% in 2013.3 Of course, we don’t pick individual companies based on large-scale trends; a key component of our investment approach has always been to pick investments based on their individual merits, and to seek undervalued companies we believe to be well-capitalized with a unique and competitive product range. We consider companies that are paying solid and sustainable dividends to be especially attractive.
Viewing the region from the now 20-year old seat of our Singapore office, what we see in Southeast Asia is a generally favorable combination of rising per-capita incomes and a relatively young population, a recipe with the potential to fuel the appetite for a wide variety of consumer goods. The challenges Southeast Asian markets face must not be easily dismissed, but overall I am optimistic about the region’s long-term growth potential.
Here’s to the next twenty years!
1 Monetary Authority of Singapore, February 22, 2011.
2 World Economic Outlook Update, January 24, 2012.
3 World Bank, “Global Economic Prospects: Uncertainties and Vulnerabilities” January 2012.