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The awakening of Southeast Asia’s tiger economies

The region is filled with young consumers, ambitious governments – and opportunities for investors

30 September 2017

Cast your mind back 20 years, to a very different world. It’s 1997: Bill Clinton is in his second term, Tony Blair has the keys to No. 10 and Britain has just won the Eurovision Song Contest for the fifth (and very possibly last) time. The West in general is enjoying an era of genuine, golden growth.

Life was also improving in more exotic places. Take Southeast Asia, which spent the 1990s transforming itself from a backpackers’ paradise to an investor’s dream. The region’s ‘Tiger’ economies, led by Malaysia, Thailand and Vietnam, had everything a risk-loving stockpicker needed: oodles of growth, soaring retail spending and (a special boon for investment bankers) companies and governments that were loading up on debt, much of it in US dollars.

Then it all came crashing down. On 2 July 1997, Thailand floated its currency, the baht, triggering the Asian financial crisis. All those expensive borrowings had effectively bankrupted Thailand, and when the baht collapsed, contagion spread across the region. Stock prices slumped and international investors fled, reassigning their capital to the next big thing: dotcom stocks back at home. When fund managers next turned their attention to Asia, several years later, it was to gaze at another marvel of growth creation: China.

Recently though, Southeast Asia (also known as Asean, acronym of the Association of Southeast Asian Nations) has begun to creep back on to investors’ radars for good reason; few parts of the world come close to competing with its growth rates. Indonesia’s economy expanded by 5 per cent in 2016, according to the World Bank; in Vietnam, growth was 6.2 per cent; in the Philippines, 6.9 per cent.

And the demographics are startling, too. The average age of Vietnam’s 92 million population is 30, according to the ever-informative CIA World Factbook. In the Philippines (103 million), it’s just 23.4 years. Compare that with the UK (40.5), or creaky old Germany and Japan (a shade under 47). This matters, because the region is not just young, but hungry for wealth. Vietnam, buzzing after decades of war and economic turbulence, is home to the world’s fastest-growing middle class, projected by the World Bank to make up 33 per cent of the population in 2020, from 20 per cent last year.

It’s a great economy to sell into and to manufacture from, with wage rates half the level of China. ‘There’s nowhere like Vietnam: it’s the last great untapped emerging market,’ says Mike Lynch, head of international sales at Saigon Securities, the country’s largest retail brokerage.

True, investing in Vietnam can be tricky. The market is opening up fast, but the two main bourses, in Ho Chi Minh City and the capital Hanoi, are thinly traded even by regional standards. Get it right, however, and there’s money to be made. The Vietnam Opportunity Fund, a London-listed fund run by VinaCapital, which invests in large-cap stocks such as Vinamilk and carrier VietJet Air, is up 10.8 per cent since the start of this year, and more than 35 per cent over the past 12 months.

‘India has great growth, and China is still robust, but the changes you’re going to see here… over the next five years, are going to be dramatic,’ says Christopher Fitzwilliam-Lay, managing director at VinaCapital. A key moment should come next year, when the index provider MSCI is likely to include Vietnam for the first time on its Emerging Markets Index watch list, ahead of full inclusion by 2020. When that happens, notes one local banker, ‘investment capital will really start to flow in’.

The Philippines is another interesting case study. Its populist president Rodrigo Duterte certainly isn’t everyone’s cup of tea. But his decision to leave the running of the economy to the experts (notably finance minister Carlos Dominguez) is bearing fruit. A tax-reform bill and infrastructure package aims to boost income across the board, lifting all boats. Growth is tipped by the IMF to come in at 6.8 per cent this year, rising to 7 per cent by 2022.