Five Asean economies and their challenges in focus

Unsurprisingly, the country receives the lion’s share of foreign direct investments (FDIs) yearly compared to its Asean peers. According to the Singapore Department of Statistics, the nation’s FDI inflows reached $214 billion in 2023, an increase of 10% y-o-y, largely due to increases in equity capital and retained earnings.

The top five source economies were the US, Netherlands, China, Japan and Hong Kong, which accounted for 64% of FDIs in 2023. The top three sectors were finance and insurance services, professional and administrative and support services, and manufacturing services. Singapore’s FDI per capita in 2023 stood at US$20,022 ($25,894), whereas its peers Vietnam stood at US$370, followed by Thailand at US$225.

FDI inflows aside, it is apparent that Singapore’s growth is not as exponential as that of its Asean peers. The Southeast Asia outlook report by DBS, Bain & Company and Angsana Council notes that just observing a nation’s real GDP indexed to 1993, Singapore’s multiple stands at 4.3 times, a distance away from Vietnam’s 8.7 times multiple, and just slightly more than Malaysia’s 4.1 times multiple.

The report forecasts that in the next 10 years, Singapore will grow at an average of 2.5%, “a far cry” from the 4% to 5% of its peers. Vietnam and the Philippines are poised to lead the region in growth at 6.6% and 6.1%, respectively, and Indonesia and Malaysia are expected to see 5.7% and 4.5% average growth.

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“Singapore has a huge drag from ageing. So ageing will subtract growth every single year demographic data in theory,” says DBS’s chief economist Taimur Baig at the launch of the report on July 30.

While the spillover effect from FDI encourages greater inter-sector and intra-sector competitiveness, Baig notes that such high levels of FDI will be moot if a country and region lack a robust capital market. “Charlie [Charles Ormiston of Bain & Company] and I are both dismayed that this region does not have a deeper and more competitive capital market. It doesn’t, and this certainly gets in the way of vigorous mergers and acquisitions, takeover, price discovery and financialisation of economic opportunities,” he says.

Singapore’s moribund stock exchange has recently been a hot topic among investors, institutions and the government. A review paper, conducted by the Monetary Authority of Singapore (MAS) with public and private industry participation, should be completed by 3Q2025 and is viewed by investors at Macquarie’s 15th Asean Conference as “highly topical.”

See also: Thailand says investment plans soar to a decade-high US$33 bil

2. Malaysia: Surprising outperformer

Malaysia is set to be one of Asean’s top performers in 2024. Despite a weak global outlook, its economic growth has exceeded analysts’ expectations, driven by stronger investment activity in both public and private markets.

Following strong economic momentum with 5.1% GDP growth in the first half of 2024, economists project Malaysia will achieve full-year GDP growth of between 4.5% and 5.5%, which will help address the nation’s fiscal imbalances.

Analysts at Kenanga Investors noted in a recent report that increased tourism arrivals, improved crude palm oil production, and progress in mega-project development should further support Malaysia’s GDP growth. They add that the ringgit has also stabilised following Bank Negara Malaysia’s initiative to encourage Malaysian corporations to repatriate overseas earnings.

Furthermore, political stability under Anwar Ibrahim’s leadership over the past two years provides a major respite for investors.

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No surprise, then, that Malaysian equities are having a stellar year. As of Aug 30, the FTSE Bursa Malaysia KLCI (FBM KLCI), which represents the top 30 companies by market cap on Bursa Malaysia’s Main market, is up 15.4% ytd and the region’s top performer, while the FBM Emas Index, which represents FBM Top 100 Index and FBM Malaysia Small Cap Index, is up 15.3% ytd.

Malaysia’s stock exchange is enjoying a banner year. Last year, Bursa Malaysia recorded 32 IPOs, raising some RM3.6 billion ($1.09 billion). This year, the bourse is on track to reach its goal of 42 IPOs, with a potential market cap of RM13 billion added. In their Sept 3 note, Macquarie’s analysts Viktor Shvets and Kyle Liu add that there is keen interest in market reforms, including the announced RM120 billion domestic direct investment GEAR-uP initiative and its potential spillover into the stock market.

Eastspring Investments’ portfolio manager, Daniel Lau, is positive on Malaysia, highlighting the proliferation of data centre investments following the moratorium in Singapore in 2021, which has been driving FDI to Malaysia. “To top it off, hardware tech companies in Penang have been gaining inroads into the global semiconductor value chain, and we continue to see FDI inflows in that aspect.”

He adds: “While we see structural tailwinds that should raise the longer-term growth trajectory for Malaysia, we continue to adopt a selective process in our review of opportunities in Malaysia. We note that valuations have run ahead of fundamentals for certain counters and tailwinds have been more than priced in. Certain AI-related names have already given back half of their ytd gains over the last three months as AI euphoria fades.”

The top holdings of Asean-focused funds available for Singapore investors include Bursa Malaysia-listed counters such as CIMB Bank, Malaysia Airports Holdings (MAHB), Gamuda and Mr DIY.

CIMB has had a good year so far for its 2QFY2024 ended June. The second largest bank in Malaysia by assets saw its net profit rise 11% y-o-y to RM1.96 billion on higher net interest income and non-interest income, which both came 2% higher y-o-y to RM2.81 billion and RM1.56 billion, respectively. The bank said the performance was driven by robust operating income growth, disciplined cost controls and improvement in asset quality, contributed by its diversified Asean portfolio.

Airport operator MAHB recently saw its share price shoot up to a record high of RM10.50 on Aug 30, on the back of the privatisation bid launched by a consortium led by its major shareholder, sovereign wealth fund Khazanah Nasional. Should the takeover exercise materialise, the consortium will wholly own MAHB, with Khazanah as the single largest shareholder with a 40% stake.

Engineering and construction company Gamuda is becoming a big player in data centres, having secured contracts worth RM1.74 billion to build a hyperscale data centre for fellow Bursa-listed company Sime Darby Property. Prior to the announcement, Sime Darby Property revealed the hyperscale data centre plans to be completed in 2026. The centre will be leased to a subsidiary of Singapore-based Raiden APAC for an initial term of 20 years.

For home improvement retailer Mr DIY, Bloomberg reported, citing people familiar with the matter, that the company is mulling a spin-off listing of its Indonesian unit as early as sometime this year. The company is said to be seeking to raise as much as US$300 million. Mr DIY has reported steady growth, with 2QFY2024 net profit up 3.3% y-o-y to RM155.21 million.

3. Indonesia: Will it stay on track to become the fourth-largest economy by 2045?

Indonesia aims to become the world’s fourth-largest economy by 2045 under its “Golden Indonesia 2045” plan, announced by outgoing President Joko “Jokowi” Widodo in May 2019 to mark the centenary of its independence in August 1945.

According to Jokowi, Indonesia aims to have a population of 309 million people, economic growth of 5% to 6% and a GDP of US$9.1 trillion ($11.8 trillion) in 2045. The country is also working towards becoming a high-income country with a target GDP per capita of over US$30,000. At present, Indonesia is set to be ranked 16th globally in terms of GDP, with a GDP per capita of US$4,580, classifying it as a middle-income country.

This March, President-elect Prabowo Subianto took it a step further by setting a GDP growth target of 8%, 1 percentage point higher than outgoing president Jokowi’s goal and at least 3 percentage points higher than the Indonesian central bank’s forecast range of 4.7% to 5.3% over the next two years. Prabowo told Bloomberg Television in May that he was “very confident” of reaching that goal. Prabowo will be inaugurated on Oct 20.

However, Prabowo also acknowledged that the country will need private investments and FDIs to aim for a nominal GDP goal of US$2.4 trillion in 2029 as domestic funding would be “insufficient”, notes Macquarie Equity Research analyst Ari Jahja in his Sept 3 report. An additional nominal GDP of IDR13,000 trillion ($1.09 billion) or an average of IDR2,600 trillion per year is required to match that growth, Jahja adds.

“A crucial driver would be higher investments, including those that are export-oriented,” says Jahja, adding that achieving the goal could take time. This would look like activities by large global and Indonesian companies and micro, small- and medium-sized enterprises. “The incoming government has acknowledged the need for more investor-friendly regulations, and to bolster collaboration with the private sector,” he adds. “Execution will be key.”

In 2024, Indonesia’s GDP is expected to grow by 5.2%, according to official estimates. In 2Q2024, the country’s GDP expanded by 5.05% y-o-y, coming in higher than expected and after its 5.11% y-o-y growth in 1Q2024.

In the Indonesian market, Jahja favours banks, consumer stocks and healthcare. He is optimistic about rate-cut beneficiaries like toll roads and telecom towers but remains cautious about the tech sector. “Foreign inflows have returned, and there is room for Bank Indonesia’s (BI) rate cuts on the back of recent IDR strength and manageable inflation,” he writes.

A day before the US Fed announced that it would cut its interest rates by 50 basis points, the Indonesian central bank BI cut its key interest rate to 6%, the first cut in over three years. BI had previously guided that it would cut its rates in the fourth quarter amid the rate cuts.

While Jahja sees upside risk to his year-end target of 7,700 for the Jakarta Composite Index (JCI), his peers at Maybank Sekuritas Indonesia are keeping their target of 8,000 points. However, the Maybank analysts, Jeffrosenberg Chenlim and Jocelyn Santoso, recommend that investors switch their positions into mid-caps and lower their positions in interest rate-sensitive blue chips.

“We believe the Indonesian rupiah will remain supported by a weakening US dollar due to increasing pessimism surrounding the US economy,” they write in their Sept 18 report. “While we continue to uphold our China reflation theme, we advise a gradual entry into the commodities sector, with the size of positions dependent on the likelihood of significant economic stimulus by China,” they add.

The analysts see Indonesian-listed counters Aneka Tambang (ANTM), Medco Energi Internasional (MEDC), Vale Indonesia (INCO) and United Tractors (UNTR) as the primary beneficiaries of China’s reflation trade. They are also positive in the healthcare sector, with Hermina (HEAL) as their top pick.

According to PwC Indonesia, in 2023, the Indonesia Stock Exchange (IDX) accounted for 51% of the 228 IPO deals in Southeast Asia and Hong Kong. The country profited from 65% of the funds raised and came in first among the IPO markets in Southeast Asia.  

4. Thailand: Lacking a turnaround on domestic macro issues

Thailand has experienced significant political upheaval in the past year, exacerbating its chronic instability due to ongoing tensions between royalists and reformists. This includes blocking popular politician Pita Limjaroenrat from becoming Prime Minister after the 2023 elections and the recent removal of Prime Minister Srettha Thavisin for appointing a minister with a criminal conviction.

The latest political change has seen Paetongtarn Shinawatra, daughter of ousted former premier Thaksin Shinawatra, take the helm. Analysts suggest this could further harm the struggling economy, as millions of Thais in debt await long-promised cash handouts promised by former Prime Minister Thavisin.

According to Bloomberg, Thai stocks were among the world’s worst performers for the first seven months of the year, dropping as much as 10% as international investors withdrew more than US$3 billion amid the above political turmoil and corporate scandals.

Yet, the Stock Exchange of Thailand (SET) Index has rallied since the younger Shinawatra took over the reins on Aug 18. The SET is up 9.3% since then, breaking over the level of 1400. In his Sept 6 note, Kaushal Ladha from Macquarie Equity Research notes that the SET volume turnover has been “massive”, coming in at THB80 billion ($3.1 billion) to THB100 billion, as compared to the average THB30 billion to THB35 billion turnover. “Foreign net flow picked up meaningfully to US$544.59 million over the past two days versus the negative US$170 million in August,” says the analyst.

Investors’ sudden optimism can easily be attributed to the announcement of the Vayupak Fund, a state investment fund seeking to raise THB150 billion to boost the local stock market. Finance Minister Pichai Chunhavajira suggested the fundraising idea in June, with Thai stocks near their lows.

The offering, which will increase Vayupak’s funds under management to THB500 billion, will run from Sept 16 to Sept 20, and allocations will be announced on Sept 23. Stock purchases will begin Oct 1, and the fund plans to invest in constituents of the SET 100 Index or other local stocks with high ESG scores.

Already, brokerages are taking note. Bloomberg reported that Goldman Sachs upgraded Thailand to market weight from underweight this month, expecting the country’s new state-controlled fund to provide “both sentimental and liquidity support, attracting foreign capital back to the market,” the banks’ strategist Timothy Moe wrote in a note.

Property, finance, banks and retail were the sectors that saw the biggest rally. Macquarie’s Ladha says Thai petrochemical company IRPC, lending company TIDLOR, and home improvement retailing company HMPRO are the stocks that are considered best performers.

On Sept 12, Prime Minister Shinawatra outlined her government’s policy agenda to parliament. The agenda unveiled plans to give away THB450 billion in handouts to jumpstart the Thai economy. “If there are no financial and fiscal measures to support economic growth, it is expected that the country’s economic growth rate will not exceed 3% per year,” she said. This is another reason for the stock market rally.

Eventually, buying fatigue will start to set in as SET Index’s forward PE has re-rated from 14 times to 15 times in a matter of days, Ladha notes. He adds that the fund does not change the country’s earnings growth trajectory.

The Vayupak fund and cash handouts may not be enough to sustain the enthusiasm for the Thai economy. “Structural reforms must be undertaken, especially those that target cutting household debt, improving industrial competitiveness, raising private capital investment and improving labour productivity,” says Ladha.

The Macquarie Equity Research Asean strategy team highlighted in their Sept 3 note that politics in Thailand is “mostly topical” and Siam Commercial Bank shared at the firm’s annual 15th Asean Conference that they are particularly cautious about the economy, especially on retail loans.

Meanwhile, Ladha says that while Thailand continues to see a strong momentum in FDI inflows, political and policy stability is imperative, alongside investing in human capital and fast-executing policies and frameworks to support clean energy and data centres.

In a bid to investors at the 8th Asean Conference held by the Singapore Business Federation (SBF) on Aug 29, Narit Therdsteerasukdi, Secretary General of the Thailand Board of Investment said in his keynote speech: “Asean, especially Thailand, could be the right destination for investors who are looking for a safe, resilient and cost-effective place away from geopolitical tensions.”

Ladha adds: “For Thailand to flourish again, manufacturing competitiveness needs to return. Through government incentives, a competitive workforce and a push towards innovation, Thailand needs to reposition itself in the value chain.”  

5. Vietnam: Rising economic powerhouse and investment hub

Before Typhoon Yagi swept across north Vietnam in early September, resulting in damages amounting to some VND40 trillion ($2.1 billion), Vietnamese officials were upbeat about the country’s economic growth.

While the storm that made landfall on Sept 7 could trim 0.15 percentage points off Vietnam’s full-year GDP growth, according to estimates from the Ministry of Planning and Investment, it is clear that Vietnam has been — and will continue to be — one of the main beneficiaries of the China+1 strategy.

For example, the country accounted for 18% to 19% of the Asean bloc’s total trade value in 2022 and 2023, ranking it second after Singapore. “Vietnam’s role as a manufacturing base for various high-tech products, coupled with its increasing integration into global supply chains, has made it a highly attractive destination for foreign investors,” Ngo adds.

In July, FDI inflows to Vietnam remained strong at US$12.6 billion year-to-date. So far, Singapore remains Vietnam’s top source of FDI inflows, followed by Hong Kong and Japan. In 2023, Vietnam attracted US$23.2 billion in FDI flows, while 2022 saw US$22.4 billion in FDI inflows.

The country’s GDP growth is also repeatedly among the region’s highest. Vietnam’s GDP in 2Q2024 came in at 6.93% y-o-y, on the back of the manufacturing sector recovering due to a resurgence in the electronics cycle. With the 5.66% GDP expansion seen in 1Q2024, Vietnam’s 1H2024 GDP stood at 6.4%.

At this rate, the country’s GDP may meet or exceed the official target of 6% to 6.5% this year. This was suggested by Vietnam’s planning and investment minister Nguyen Chi Dung, who said that the country’s economy may grow by 7% y-o-y amid the improvements in the industrial and construction sectors on July 6.

To Fan Li, managing director of Warburg Pincus Singapore, Vietnam has been doing a “decent job” in cultivating a pro-business environment. He believes Vietnam is the only country globally following the “highly successful” East Asian growth model adopted by countries like China, Korea, Japan and Singapore.

Fan notes that the Vietnamese government has “done right” in signing free trade agreements (FTAs), including 18 FTAs with the US, Japan, South Korea and Australia in the last two to three years.

Vietnam also shares a land border with China. “If they [the Chinese manufacturers] require certain materials that are still only available back home, they can easily drive a truck across the border and get the materials they need,” he adds.

The Vietnamese government has also continuously been investing in improving local infrastructure, with a budget as high as 6% to 7% of its GDP, about twice the Asean average in spending. “And that reminds me of China about 10 years ago,” says Fan.

However, according to William Fung, group deputy chairman of the Hong Kong-based Fung Group, Vietnam will first have to focus on more traditional industries, such as garment manufacturing, before embarking on its grand plans to become the next industrial hub.

“I know it’s not very fashionable. The chairman of the Ho Chi Minh City People’s Committee [Phan Van Mai] kept talking about electronics. Yeah, that’s sexy, but the reality is that the first rung of the ladder are things like assembly skills, sewing skills and so on,” says Fung. “And you get these people first to move away from the agricultural sector into a more productive industrial sector, and then over time, you have to be patient… all these will move the whole country up.”

All the factors above that make Vietnam attractive to foreign investors are also the exact reasons why UOB Asset Management (UOBAM) Malaysia’s CEO Lim Suet Ling thinks the nation represents the next wave of growth potential.

Lim notes that as an emerging market in its “early stages” of economic development, investors can tap into the potential for strong returns and “unique opportunities” to participate in the country’s rapid growth as it expands and matures. The analyst is also positive about the financial sector, which will benefit from the country’s credit growth and improved credit costs as the real estate sector gradually recovers. She also favours the IT and transportation sectors.

Beyond equities, Vietnam’s industrial real estate space remains “attractive” as the structural tailwinds behind the sector remain “intact”, according to Warburg Pincus’ Fan. Across the firm’s real estate and private equity investments in Vietnam, the country is the firm’s top five investment destinations globally and its third largest investment destination in Asia after India and China.

“The entrance of international manufacturers and developers have resulted in healthy [and, or] sustainable land price appreciation,” continues Fan. “With more international players entering the market, we expect the industrial real estate market to become more institutionalised, similar to other countries which have experienced such rapid growth.”

The group is also interested in investing in logistics warehouses due to the strong demand resulting from high e-commerce growth. Vietnam recently overtook the Philippines as the third-largest e-commerce market in Southeast Asia. According to market analysis firm Metric, consumers in Vietnam spent VND143.9 trillion on e-commerce platforms in the first half of this year.

Furthermore, Vietnam’s existing prime modern stock at 0.02 sq m per capita is a “small fraction” compared to its neighbouring countries like China and South Korea. “[This] presents an attractive opportunity for the institutional-grade warehouse market to grow severalfold over time to meet future demand,” says Fan.

See also: After a reset, has Asean found its mojo?