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Islands of Promise: Why the ASEAN Region Matters

FEG’s 2020 Approachable Asia event was scheduled for this fall in Singapore, where we planned on venturing abroad to learn first-hand about the unique challenges and opportunities of international investing in a board room setting. Our goal was to provide clients the opportunity to meet with top investment and economic leaders, including local asset managers and companies. 

With the Coronavirus pandemic, we have opted to offer the same content through our Approachable Asia podcast series. Skip the flight and enjoy the conversation!

In this episode, we chat with ASEAN expert James Johnstone of RWC Partners.

Topics covered include: 

  • Why should investors care about the ASEAN region?
  • How have e-commerce giants impacted ASEAN consumer trends?
  • How has the pandemic impacted ASEAN tourism and healthcare industries?
  • What opportunities are there for the ASEAN region as the U.S. decouples from China?
  • What are the best ways to access ASEAN countries in a portfolio?


James Johnstone
Portfolio Manager, RWC Partners

James is the portfolio manager for the Frontier Markets strategy at RWC Partners. He also serves as a member of the investment committee for the RWC Emerging and Frontier Markets strategies. He has 24 years of experience in investment management and research. Most recently he was a Senior Managing Director and Director of Investments at Everest Capital, since 2009, where he was responsible for portfolio management and research in frontier markets. Prior to this James was a co-founder and CIO of Alcor Investment Management, a long-short, multi-strategy Asian hedge fund headquartered in Singapore. He previously worked for Gartmore Investment Management for three years where he was a member of both the long-only and long-short global emerging markets teams. He started his career with Schroders Investment Management, working on the UK equities and Global Emerging Markets teams. James also served in the Royal Navy for five years. He graduated from Christ Church, Oxford University with an MA (Hons) in Classics and Modern Languages. James speaks Russian.

Greg Dowling
Chief Investment Officer, Head of Research, FEG

Greg Dowling is Chief Investment Officer and Head of Research at FEG. Greg joined FEG in 2004 and focuses on managing the day-to-day activities of the Research department. Greg chairs the Firm’s Investment Policy Committee, which approves all manager recommendations and provides oversight on strategic asset allocations and capital market assumptions. He also is a member of the firm’s Leadership Team and Risk Committee.


Greg Dowling (00:07):

Welcome to the FEG Insight Bridge. This is Greg Dowling, head of research and CIO at FEG. This show spans global markets and institutional investments through conversations with some of the world's leading investment, economic, and philanthropic minds to provide insight on how institutional investors can survive and thrive markets and finance.

Greg Dowling (00:29):

FEG's Approachable Asia 2020 event was originally scheduled for this fall in Singapore. It is an event where we take a handful of our clients for boardroom-style education and to meet with local managers. Well, that was the plan before the coronavirus pandemic hit. The good news is that through a series of podcasts, you can receive the same content and get to skip the 16-hour flight.

Greg Dowling (00:56):

While we often mistake the ASEAN region as a series of small island countries sandwiched somewhere between India and China, that's a big mistake. As a region, they have a larger population than both the United States and the EU. Also, their combined economic impact is already large, and growing. Today on The Insight Bridge, we will chat with an ASEAN expert, James Johnstone of RWC. James co-manages RWC's emerging markets and frontier teams. He has spent years investing in this region and others. We will focus on the current opportunities and what makes this region different than other emerging markets. James, welcome to the FEG Insight Bridge.

James Johnstone (01:43):

Nice to be here, Greg. Thanks very much for having me.

Greg Dowling (01:45):

Would you please briefly introduce yourself and your firm?

James Johnstone (01:49):

James Johnstone. Yes. I've been working in emerging markets now for about 25 years. So I do feel like I've served my time. I joined Schroders in 1995, having been in the Royal Navy. So I'd sailed the seven seas and seen a corner of the world and thought it was time to invest in these new Asian markets, which were developing, after I'd spent some time in Hong Kong. Over 25 years, we've obviously seen huge changes in the emerging markets. I've moved a couple of jobs. But we landed up at RWC in 2015--my partner, John Miller and myself. We now run about $9 billion in the emerging market. So we've got another focus as well on the next generation of markets and frontier markets. It's a big team and we do a lot of traveling.

Greg Dowling (02:30):

So for many people, these are just a bunch of islands somewhere between China and India. Why should investors care? Give us some stats.

James Johnstone (02:38):

Well it's a great question. I think of course they should care. So I'll just give you two stats to start. One is the U.S Chamber of Commerce in China did a survey of their members in mid-2019, so pre-virus. But they did a survey of their members and the question was, "What percentage of you are thinking of increasing or decreasing your investments in China?" And 50% said they were thinking of increasing their investments outside of China. And as the follow-up: "Where are you putting those investments?" Another half of them--so 25% of all the respondents said, "We're looking at ASEAN." So they care, so I think we should care. And just for your listeners--anyone who's been to a Red Lobster, that's owned by a Thai company. Anyone who's drank a Chang beer recently, again, a Thai company. And I had a Smashburger recently--bought by Filipino fast food company about two years ago. Anyone whose drunk a Red Bull high energy drink. Anyone who's ever stayed in an Empire or NH hotel on their travels around the world, again, Thai company. And if you want to have a coffee in Dean & DeLuca again, owned by an ASEAN company. So there's a lot of ways that ASEAN has influence across the world, which we just might not know about. And I think it's a really important part, but ASEAN is a really big, important economic block.

Greg Dowling (03:46):

I feel like the way that most people have played the ASEAN region is through the consumer. Maybe talk a little bit about how the ASEAN consumer is different than just the mainland Asian consumer.

James Johnstone (04:00):

Sure. Well, I thought I'd give a little bit of history on ASEAN, just to kind of put it in context, "What are we talking about?" So ASEAN, as you know, is the Association of Southeast Asian Nations, it was founded in 1967 and there are 10 countries today: Indonesia, Thailand, Malaysia, Philippines, Vietnam, Brunei, Singapore, Myanmar, Cambodia, and Laos. So let's think, if that was a single country, that would be the fifth-largest GDP in the world with an economy the size of 3.2 trillion. There's 650 million strong population, that's the consumer you're talking about. And with an consumption expenditure, today, of $1.8 trillion. So before we look at how the consumers--well, let's just think how this success story happened. Post the second World War II, Korea and Japan are the two most obvious economic recovery stories that we know about. But Singapore also has to be up in the kind of pantheon of the best success stories of the last 50 years.

James Johnstone (04:52):

It's risen from a small trading outpost where British armed forces were nearly 40% of GDP in the 1960s to be one of the richest countries in the world today with a GDP per capita of 70,000. And I would recommend anyone who's interested to read Lee Kuan Yew's autobiography, which really is one of the most incredible reads to understand that progress. It is almost the playbook of how to be frontier to developed in 50 years. So these original ASEAN tigers... Before we talk about China, let's not forget, China really didn't play any role in the global economy up until about 2000. So really, the ASEAN tigers took on that manufacturing success story from Japan as a result of Japanese capital. Japan wanted to find somewhere to invest its excess capital. It wanted to have lower-cost manufacturing. They wanted to find a new outlet for some of its consumer goods.

James Johnstone (05:38):

That's all she began to invest into Thailand in Malaysia. Toyota famously founded a huge part of the auto industry in Thailand. And then let's think--Intel, Western Digital--these are the biggest manufacturers that moved to Malaysia and Singapore. I mean, 75% of the world's hard drives were made in Malaysia and Singapore in the 80s and even up until the 90s. So then obviously China turns up in the WTO in the early 2000s. And suddenly we have this incredible manufacturing miracle, we've lifted 750 million people out of poverty because of the low cost of labor that China gave on offer to global industry. And that's obviously been a phenomenal success, but we should never forget that ASEAN was there first, and ASEAN in the background has bubbled away. We've now got this large economic block--as they say, a $3.2 trillion economy--and we're beginning to see this reverse.

James Johnstone (06:23):

Now we're going to come on to some of the tensions that we're seeing in the world today. But as I said in my first thing, a lot of companies are looking to have that "China Plus One" manufacturing base in Asia. Now that was always the plan. It's so happened that China worked so incredibly well, that a lot of companies forgot the "plus one." They've suddenly been reminded of that very quickly, both by that the trade tensions, by the very substantial rise in wage costs that we've seen in China, which obviously underpins why China has done so well. And as well by the virus, people are seeing that supply chains can't be as concentrated in one country. We're seeing some elements of reshoring back to developed markets, but we're also seeing people beginning to look at these very exciting countries across ASEAN as a potential manufacturing source.

James Johnstone (07:06):

As people get richer people want to satisfy their needs first. If you wash your hair with it, if you brush your teeth with it, if you eat it, if you need better education, better healthcare for your children--but as you start to see GDP per capita move from that $1000 to $5,000 range, that's when you really begin to see the consumer staples companies move. And we've got some good examples in ASEAN over the last couple of years, you know, we call it the "well-trodden path" as you make that transition up the GDP per capita line. And it's interesting to note that China's been through that stage, China had that golden age of the 5,000 to 10,000 per capita GDP, between 2005 to 2016 was their golden age. ASEAN was there ahead of China and it's now accelerating into that golden age.

James Johnstone (07:52):

And so if I give you a couple of examples, we talked about Smashburger. Yeah, Jollibee, when I first met them in the early 2000s--this is a quick-service restaurant. This is the eponymous food chain of the Filipinos--had about $560 million of revenues in 2015 with 600 stores. That today is a $3 billion revenue line. And at 3,500 restaurants globally, very concentrated in China, Vietnam, Thailand, and obviously in America with Smashburger. So the market cap went from a billion to 7 billion--a huge raise of consumers. People love the emerging market consumer story. But ASEAN in the last 5, 6 years has really been out of favor, and that market cap has fallen back to $3 billion. The consumer across ASEAN has really been like the consumer across most of the... In fact, most of the world. As you get richer, you can satisfy your wants. We'll come later as to how wants become needs as we move into the discretionary income. But hopefully that gives you a flavor--forgive the pun--gives you a flavor of how the EM consumer has been kind of mimicked by its growth in ASEAN.

Greg Dowling (08:52):

All right, you hit on income. Maybe you could talk a little bit about how geography and weather--whether you reside in a city or out in some rural area--impacts this.

James Johnstone (09:02):

You'll see an urbanization. I mean, that's undoubtedly one of the key things, as you do begin to drive the agrarian revolution and these markets down, as you begin to reduce the dependence on large families, as you begin to have a smaller family construct because you have low birth rates, you begin to drive urbanization. As you drive employment in factories versus farms, that, again, drives urbanization. So we are seeing the rise of the big urban innovation. Anyone who's tried to get around Jakarta, for example, would know that the traffic is pretty awful, and so motorbikes are very useful. So we are seeing there are different challenges, definitely in Southeast Asia. Indonesia is an archipelago of several thousand islands. And to have a distribution network that fits that geography is very important. So we are seeing that it's not going to be the same as in China or the same as in India, but the urbanization and growth of large-scale cities is definitely going to enable those elements of the urban areas to do well.

James Johnstone (10:01):

I was thinking about in terms of when we get onto e-commerce, we'll see how e-commerce is currently dominated by the urban centers. Where urban centers might be about 15 to 20% of populations, but actually they're more like 50, 60%, today, of e-commerce activity. But we are seeing that the supply chains are improving. We are seeing the increase of infrastructure. Infrastructure spend is one of the most important ways that emerging markets do drive their ability to grow. You need to have cement roads and bridges and railways and airports. And that's a key part of the whole evolution of emerging markets. And as we see, those do improve, we see the ability for supply chains to improve with them. So it's a long-term story, but we've definitely seen the first signs of it working in ASEAN. As you said, if you go to Singapore today, the skyline could be anywhere. But similarly, if you go to Ho Chi Min, you go to Thailand, these are pretty incredible skylines now. And especially if you had told me in '97, '98 post the Asian crisis, that you were going to see skylines of this magnitude and this wealth, I don't think many of us would have really believed it.

Greg Dowling (11:03):

So 2020 is all been about tech. It's tech, tech, tech. Is there any tech industry in the ASEAN countries or are they just merely using U.S. or China technology?

James Johnstone (11:15):

It's a question. And I think obviously one of the key aspects is--because, as you say, the Chinese influence on markets and global economies has been so strong recently, and the rise, obviously, in the last six months as they're working from home, you've had this huge concentration into the technology food chain. And historically that's always been a North Asian part of the economy, since really you saw China, Taiwan, and Korea take on the mantle of what really was a Malaysian thing for the hard drive industry, as you said earlier. But yeah, as you do begin to drive penetration of technology and smartphones and the internet, it is incredibly to remember that that then enables you to go on about your consumption of toothpaste or beer or medicine. You want to access the same things. I famously--I remember I was in quite a remote location in Indonesia and I was just talking to one of the staff in the bank that we were meeting.

James Johnstone (12:12):

And they said, "Listen, really, all I want in life is I want to have a Spotify account. I want to have a Netflix account. I want to have an Apple or iPhone." So people's requirements or needs are pretty universal these days. So there's an element that obviously we're not expecting to find the latest Indonesian smartphone manufacturer to take on Apple. But we do think that there's very important ways that these things have to be localized. And so we are seeing a dramatic shift towards technology. If I put it into context--and this is on mobile subscribers, which obviously people have more than one SIM card--but yeah, Southeast Asia, ASEAN is already the third largest user of mobile subscriptions globally at about 900 million phones a year. That's one and a half SIM cards per person. But importantly, it's also going to be the third largest internet usage pool within the next couple of years.

James Johnstone (12:59):

So it will exceed North America quite soon. So there's a lot of people who are online. The rise of the cheap smartphone is delivering the ability for people to do all the things that we'd expect to do. Now, having said that, as to your point earlier about infrastructure and the concentration of people, the internet economy is relatively limited so far in Southeast Asia. GMV in ASEAN was $5 billion in 2015, today it's $38 billion. So we've seen pretty substantial growth already. It's expected to grow another 4 times over the next 6 years; it should hit $150 billion in 2025. But these are very small numbers relative to what we're seeing in some of the bigger emerging markets. So we're seeing today, for example, maybe 2.5% to 3% of GDP is currently transacted as GMV. That number is more like 25% in China. That number is more like 15%, 16% in the U.S.

James Johnstone (13:53):

So there's a huge amount of room to grow, and that tells me that, as yet, we haven't yet seen who the winners are going to be. You talk about--obviously what we're really here to talk about is stock markets. There is one current listing, a company that listed about 2 years ago called SEA--obviously very well named for Southeast Asia--and that's done incredibly well. I mean, this is a stock that's gone from $10 post the IPO to being a $140 stock in the last 12 months. Now a lot of that has been because of the scarcity value. It is the only listed Southeast Asian technology stock. It's got very good parentage, Tencent is the ultimate parent. So that's been an incredibly strong beneficiary. And so to your point, we are seeing a lot of Chinese internet giants dominance coming through by them in effect funding a huge amount of potential applications across Southeast Asia.

James Johnstone (14:45):

But there have been some very interesting domestically launched ones. So people like Gojek, Grab, these are two of the big Indonesian, Singaporean, unlisted companies. Now again, we've seen Alibaba obviously come in to fund some of them. But these are amazingly exciting future companies. Lazada, Tokopedia--both online shopping, eCommerce companies. Travel Oka. I mean, there's a lot of exciting new companies coming through. At the moment, we've only got one really to focus on that, the listed element of fee. Yeah, it's done incredibly well. It's now a $70 billion market cap with no EBITDA. So whatever valuation metric you're trying to buy to it, you're having to look for some EBITDA in 2022. So we think it's probably done very well or well enough possibly.

James Johnstone (15:27):

But again, if you look back at that well-trodden path and the golden age, in many ways, when we talk about the well-trodden path and we talk about history rhyming, if you just think back briefly as to the evolution of income. So if ASEAN incomes today are around $6,000, that's where Chinese incomes were in 2007. So that's an 11-year gap. Chinese incomes today are where Korean incomes were in 1990, that's a 28-year gap. And Korean incomes are where Japanese incomes were. So we know what's going to happen. So we think that that GMV penetration that we talked about is very likely to continue, that e-commerce penetration continues to pick up. So there's a huge amount of activity to be done. We've talked about e-commerce. Online fashion is an incredibly big part of the market, which is at even lower levels of penetration. And I don't suppose we could really talk about fintech or e-commerce without talking about the latest big IPO, which is Ant financial. Now we've been lucky enough to have Ant financial as co-investor or the big investor in a couple of our frontier investments across Southeast Asia.

James Johnstone (16:31):

They bought into a Myanmar business called Wave Money. Not strictly in ASEAN, but in Bangladesh bKash has had a very interesting involvement from Ant. And obviously we're now getting Ant listing on the public market. So your fintech is incredibly exciting. And we've long talked about the thematic of digital inclusion. It's much harder to persuade someone, as you say, in rural Indonesia or rural Myanmar to go into town and set up a bank account, but if you've got up to 2G now or even a 3G smartphone, and you have the ability to have a mobile wallet, the ability to drive digital inclusion and financial inclusion is dramatic. And as we've seen with the numbers, the returns on the investment are enormous too. So e-commerce is coming in Southeast Asia, we have bits and pieces. The scarcity value has driven valuations up where we have, but I would really expect this to be a very dramatic part of the markets over the next 10 years. And just to put it in context, today technology as it is, is about 2% of Southeast Asia's market cap. That's where China was 10, 15 years ago. China today is about 20%. And again, the U.S., which was at about 20% 10 years ago is now at about 40%. So we know tech is here to stay. We know that the events of the last 6 months have only made that even more obvious. We think that the future for Southeast Asian tech is incredibly bright.

Greg Dowling (17:52):

You mentioned earlier, the ASEAN area was one of the earlier areas for offshoring. So as the U.S. decouples from China, is there an opportunity for this region to absorb some of this back? What can they do? What can't they do? Do they have the infrastructure that is required?

James Johnstone (18:13):

Great question. Again, it comes back to the point that China was so successful and the China Plus One was forgotten about. It became China was the be all and end all. Let's just say, supply chains are incredibly complicated and they need to have a long tenure. Having said that, there's an incredibly important element to costs. Chinese costs over the last 10 years have risen very dramatically. So regardless of whether you end up seeing increased tensions, geo-politically between China and the U.S. there was a good reason for people beginning, even as I said, in 2019 to begin to look to want to relocate, because this is the age-old question of labor versus capital. And so, yeah, Chinese costs now are something around three or four times more expensive than Vietnam, or maybe seven times more expensive than Bangladesh or Pakistan.

James Johnstone (19:01):

It's an important question. And the other thing to remember is demographics. The median age of the 650 million population of ASEAN is about 30. China is going to get old pretty quickly. We're facing a fairly strong demographic situation. So in 2000, there was an enormous amount of the Chinese rural population that wanted to move to the Eastern seaboard, to the Pearl River Delta and wanted jobs. Twenty years on, that workforce is getting older. We're getting to a stage now where China--with the one-child policy, China is getting to a stage where its workforce is aging. And where else do you have that concentration of expertise? Where else do you have that concentration of educated, literate workforce outside of Asia? Well, yes, we're seeing some in Mexico. We're seeing Mexico beginning to take some of its business back. Obviously there's hopes for Brazil. Africa, obviously my other beloved part of the world, that's where you're seeing population growth of 1.2, possibly to 3 billion. And could Africa be the next manufacturing miracle? Who knows.

James Johnstone (20:00):

But it still looks as though that the low-cost manufacturing labor costs that you can drive in ASEAN will be there. Now let's just put some numbers on it as well. So Chinese exports to the U.S. are $550 trillion and ASEAN exports to the U.S. are $185 trillion. So even a 10% decline in Chinese exports to the U.S.--which all went ASEAN--is a 30% hit hype. Let's think about manufacturing. U.S. manufacturing, in Eastern Asia is $2.3 trillion. Chinese manufacturing is $4 trillion. Now, if you add it up, about 28% of the world's manufacturing is now focused in China. The largest ASEAN manufacturing industry is in Indonesia--obviously by virtue of the fact that its a $1.1 trillion GDP--and that's only $200 billion. Thailand's at $135, Malaysia's at $80 billion, Singapore's at $60, Vietnam is only at $45 billion. So $4 trillion, 1% comes out of China, that doubles Vietnamese exports.

James Johnstone (20:58):

In no way am I saying that there's any chance that the world can untangle itself from China, even if we're all told to tomorrow. I think we'll come on to the tensions. But one of the key things is the world is far too mutually interdependent on the relationship between the EM consumer and the Chinese production line. And ultimately, as well, the Chinese consumer today. If you look at the percentage of sales for the U.S. semiconductor industry or U.S. hardware into China, the vast likelihood is you can't untangle it. But for Southeast Asia in particular, just a tiny amount of FDI that decides to leave China and decides to enter ASEAN is huge. Now, Samsung used to have a lot of handset manufacturing in China.

James Johnstone (21:40):

I visited the Samsung factories outside Suzhou many years ago. They now have zero manufacturing of handsets in China, and they've relocated all of it to Vietnam. So 50% of their handset manufacturing is now out of Vietnam. Vietnam is really attracting a huge amount of inbound Japanese, Korean, and Chinese FDI, and increasingly European and U.S. FDI. Vietnam does sit in that sweet spot where the ASEAN tigers were in the 80s and China was in the 2000s. So Samsung has proved that it can be done. You also are beginning to see a pickup in Thai and Malaysian low-cost tech manufacturing. There are companies out there that, again, I met in the late 90s which have carried on doing what they were doing, very much overshadowed by the rise of China, but yet you've still got your electrical machinery, printed circuit boards. You've still got a lot of the semiconductor supply chain. And I think that can come back. But it's important, as you say, to think that not all of that $4 trillion is going to leave China. China's got an enormous domestic market that it wants to feed. But just a small fraction of that has a huge impact on driving FDI to ASEAN. And of course, what does that mean? That means jobs. That means urbanization. That means increases in consumer expenditure, which comes back to those companies we were talking about earlier.

Greg Dowling (22:57):

So will this region be stuck in the middle as these two superpowers battle it out? Given the geographic location, are they closer to the U.S. or closer to China? Here in the U.S., we can decouple somewhat, although it's going to be difficult. We don't share an ocean. We don't share borders. How can they do this? How can they walk that line?

James Johnstone (23:21):

Probably the most important question globally both for geopolitics and the stock markets today is to the future of the U.S.-China relationship. And it's honestly one that we spend a lot of time at RWC discussing. And as you know, we have the help of RiceHadleyGates consultancy. It does appear that, as you say, China's decided to take a more expansionist role. They spent a huge amount of money on their military, as you say. ASEAN does have a role to play in kind of balancing between the two superpowers' influence. It's interesting. There's a lot of surveys done. Broadly half of ASEAN tends to side with the U.S.--Vietnam, the Philippines, Singapore, Indonesia have kind of historically tilted towards the U.S. And then you found countries like Myanmar, Brunei, Malaysia, Cambodia, Thailand, maybe have had more Chinese influences. But there definitely does appear to be a requirement and an understanding from the ASEAN leadership that it's not in their interest to pick sides.

James Johnstone (24:20):

They really have to make sure that the status quo as such remains, and they will be a big beneficiary of the status quo. But obviously they do need to be very aware. Obviously the Taiwanese question has been asked more and more, especially after the recent events in Hong Kong. So I would say it's definitely a very important choice. Pragmatically, it looks as though both countries will always get to the edge of a sharp tension and ultimately it's in neither country's interest for this to really bubble up too much. Obviously there's a huge amount of politics coming up to the U.S. elections over the next two months. But yeah, as you say, for ASEAN it's incredibly important that the status quo continues.

James Johnstone (24:59):

I think one of the interesting things is obviously the One Belt One Road initiative. We've seen many... A lot of people thought this was a new event in geopolitics. We've seen hundreds over the last 2,000 years, hundreds of such events where excess capital and excess savings has had to be redeployed from the current winner of the global economic environment into excess savings leading into investments elsewhere. We talked about the rise of Japan and Korea post the second world war. And then obviously the Japanese capital that was kind of very liberally spread out about the world in the 80s. So China's very big, bold announcement of One Belt One Road is obviously an incredibly important geopolitical event, but it's nothing we haven't seen before. And honestly I think it's something we will see again. He jumps, we've begun to pull back a little bit in terms of the overwhelming nature of the headlines. Some countries have pulled back from wanting to have too much Chinese influence--not just in Africa, but in other parts of Southeast Asia, which comes back to the balancing impact.

James Johnstone (26:00):

But it is an important part of what China is trying to do. And remembering that the geography of where we are, the Malacca Strait has long been seen as one of the weak points of China's economic survival. That's where the vast bulk of their oil supply comes through. And so you do get interesting ideas. Like the Panama Canal over 100 years ago, we're talking about a canal across Thailand, we're talking about a road bridge across Malaysia. So we'll continue to have a lot of these interesting big infrastructure ideas, because that, again, does highlight one of the weak spots of China. But overall, we do think the economic necessities of life... We know that China, as much as any other economy, has to deliver prosperity and welfare and jobs. And that's one of the most important ways to keep governments in power. In that respect, we don't think that the situation in the South China Sea is really going to be too much of a tinderbox. But it's an incredibly important thing we need to watch.

Greg Dowling (26:59):

What is the impact of COVID? I think of many of these countries as being great places for tourism and travel.

James Johnstone (27:06):

So as you say, North Asia, China, Taiwan, Korea had a relatively difficult period early Q1 and got through. It's interesting to note that in line with much of the world, the vast bulk of ASEAN will see between -5 and -15 Q2 GDP declines. The one standout is Vietnam, which is probably going to be positive, even in Q2. And will still report maybe +4 for 2020. And we've seen that Chinese exports have recovered because of the restocking that we needed across the world. We're seeing similar in Vietnam. Vietnam was an important part of the restocking as we've seen inventories come down globally. But you're right, this has been a very difficult period for many of the ASEAN markets.

James Johnstone (27:49):

Obviously some of the bigger, more developed markets such as Singapore have locked down incredibly hard and incredibly fast and had very few instances of the virus and therefore the governments can reopen those markets pretty quickly. We've spent a lot of time looking at the stringency index in terms of how hard you locked down, and really the Philippines and Indonesia's standouts have been having quite hard lockdowns in urban areas because of the weakness of their health systems, which we can come back to. One of the key points, as you say, is tourism and travel. Now, tourism and travel was a very important theme for us. The growth of the Chinese tourist mimics what happened to the growth of the Japanese tourist in the last 20 years. For many years, we've had a strong China tourism theme, only 1 in 10 Chinese people still have a passport. The growth rate's still very strong.

James Johnstone (28:34):

And Thailand, as you say, is an incredibly important tourism story. Thailand has grown tourists from, I suppose, the early 90s when I first went there at a level around 4 or 5 million, it hit 10 million in 2010 and it's going to hit 40 million in 2020, until the virus hit. Now, we always knew that the vast bulk of the countries that we're talking about had a strong tourism element. You think about the big EMs: China, Korea, Taiwan, India, Brazil, Russia--tourism is important, it's nice, but it's not what you associate with those countries if I say those names to you. If I say Thailand or Indonesia or the Philippines or maybe Myanmar, Vietnam, you immediately associate beautiful beaches and a wonderful holiday. And unfortunately, we never expected--and this is how I say "mea culpa" on our point--that tourism would go to zero. But you did suddenly have tourism and travel virtually hit zero, which has been obviously an incredibly devastating impact.

James Johnstone (29:39):

Now having said that, there are a couple of mitigating factors. The governments in many of these countries have done incredible things with moratoriums, they've been very quick to support their tourist industries. And domestic tourism--as you've had this increase in domestic wealth, actually domestic tourism has kicked in. So obviously it's not nearly enough to fill the hole left by global tourists, but it has made an impact. In Vietnam we've seen a huge pickup in domestic tourism. Vietnam reported zero deaths from virus until about last month when they picked very mildly. But we've have seen that this return of domestic tourism or this increase in domestic tourism. And so, that very sharp hit that tourism has had--when you do have from 17% of GDP in Thailand down to 12% in Vietnam, 12% in the Philippines--yes, it's been dramatic.

James Johnstone (30:29):

Bringing markets into it. Yeah. That is why ASEAN is still down nearly 20% for the year in dollars. Yes. This has been one of the biggest headwinds, which none of us ever expected, we always thought it was a lovely tailwind to GDP. And that's why you've seen this huge deviation in performance, because North Asia is very much tech, tech hardware and had very little GDP impact from tourism. Whereas if you look at the big ASEAN markets, a huge amount of them have a huge impact from tourism. Yeah. That open seat for me, it makes me incredibly excited for 2021. The whiff of a vaccine or the whiff of the world beginning to understand the complexities and the death rates and the mortalities of what the virus actually has impacted. I went on a holiday to Greece--I'm not going to get on a plane to Thailand yet. But Greece is beginning to reopen, wearing a mask on a plane was a bit different, but we saw it with SARS and tourism was massively affected, but people want to go on holiday.

James Johnstone (31:26):

People want to relax. And we do think that the virus will be under control. I'm not saying there's a--we're going back to normal, but the new normal will still involve beaches and hopefully sitting in the sun and relaxing. So ASEAN is a big tourism--you've got 133 million tourists ASEAN, and I would expect that to recover and more '21, '22, '23. But again, I don't think globally, we anticipated this. Globally tourism and travel is 12% of global GDP. We've all seen the reaction from the oil price as a result of this. So it's interesting to see that ASEAN is one of the worst affected parts of the global economy, but honestly that gives us great excitement for when the recovery comes

Greg Dowling (32:07):

Kind of related to COVID, healthcare has become a bigger focus because of the pandemic. What does the healthcare landscape look like in these countries?

James Johnstone (32:16):

It's very dependent on which bit of ASEAN we're talking about, because parts of ASEAN are incredibly sophisticated. I lived in Singapore for 10 years. I'm an ASEAN believer. I lived, worked, and traveled there and Singapore medical tourism became a huge parcel of the country's DNA. Obviously it's a relatively small population set. But as you began to attract incredibly high costs, healthcare companies, as you began to develop your very strong domestic doctor base, as you begin to look at the, the concentration of doctors and nurses, the beds per thousand, Singapore now looks like any developed market, if not better. So the Singapore medical system is world-class. Obviously, as you then would expect, Thailand and Malaysia being that much higher up the GDP per capita chain... There has been very interesting case studies. Again, much as travel and tourism is a strong thing for us, healthcare is a hugely important thing.

James Johnstone (33:12):

Again, as you get richer, one of the first things you want to do is you want to have better healthcare, better medical treatment. You want your government to provide hospitals and doctors, and you want to be able to access them and have better access to pharmaceuticals. So this is a very natural event to your question earlier, "What does the consumer do?" So Bangkok has grown from a billion dollar market cap and hit $14 billion and since pulled back to about $10 billion. And over that 15-year period, revenues have gone from $400 million to over $2 billion. Now medical tourism is an incredibly important feature, especially with the decline or the huge imposition of healthcare costs on the European--there I call them socialist governments. I do live in Europe, so I think I can say that. And if you look at the U.S. Where 20% of GDP is healthcare, the world is crying out--the developed market consumer is crying out for a cheaper procedure for a hip or for plastic surgery than they can get elsewhere.

James Johnstone (34:04):

So you have this enormous rise in medical tourism to Thailand. Where better to go to have a cheaper hip operation, and then sit on a beach for two weeks? So that drove an incredible part of Thailand's medical infrastructure, but at the same time you had the development of the domestic base. You had a richer population who wanted hospitals. IHH, a big medical business in Malaysia, again, $11 billion market cap with very exciting international operations in countries like Turkey and India. The interesting element--obviously they're more developed, they're more expensive. You know, you've seen a big part of the market cap growth. But you look at countries like Indonesia and the Philippines where they've had to have more stricter lockdowns, because they have a more embryonic healthcare system where you do have fewer doctors per capita, you have fewer nurses per capita.

James Johnstone (34:55):

And that's where we see huge upside. We have exciting investments across some of the Indonesian hospital stocks. You do have this move from the government to provide national insurance healthcare and you've moved people onto the kind of national system of pay insurance versus pay as you go and that's always associated historically with a big pickup in admissions. And so we do see some incredibly exciting opportunities, again, in those kinds of earlier-stage per capita GDP parts of ASEAN. Similarly with pharmaceuticals, there are some very exciting opportunities, and overall, the growth of nutritional awareness. We are beginning to see people want increasingly access to different of nutrition, maybe plant-based meals. We're looking for food additions. We're looking for--Chinese traditional medicine is coming through. So there's very exciting elements across healthcare, and that's always been a very important part of our process.

Greg Dowling (35:51):

Vietnam seemed to be the area's market darling over the last few years. Does that still hold today? I mean, are there any yet liquidity issues or any restrictions on foreign investment that people should be aware of?

James Johnstone (36:06):

It is undoubtedly, from a macro perspective, one of the most exciting stories we've seen for a long time [inaudible] talked about, but as you know, stock markets don't always reflect macro. It can get priced in pretty quickly. So we had a situation in early 2018 where Vietnam really had a spectacular move. If you remember the history of Vietnam, it's first big capital market explosion was really the 2007-2008 boom when all emerging markets had this amazing liquidity rush. That continued longer in Vietnam, the bubble didn't burst until 2011. You had a very difficult period '11 to '16, and then the central bank did the right things about controlling the dong. You reduced inflation. You managed to actually get long-term inflation and interest rates under control, and it began to move. Now, as you say, one of the problems with small emerging markets, frontier markets, is there can be an awful lot of capital that tries to get in, in a very short amount of time to reflect future long-term growth.

James Johnstone (37:03):

And obviously one of the things we focus on most is valuations combined with FX combined with a top-down perspective. And Vietnam had an enormous--dare I call it a "bubble"--in Q1 '18, from which it hasn't yet really recovered. The great joy about these smaller emerging markets, frontier markets, is that what we see today is not what you're going to see in 20 years' time. IPOs, capital raisings, this is an incredibly important part of the stock market evolution of emerging markets. I still remember the IPO of Tencent. It really was .10. And if I'd held it forever, I wouldn't be sitting here today. But we know that the capital evolution the broadening of the capital structure.

James Johnstone (37:41):

And so we like Thailand a lot. We're not particularly big fans of some of the biggest listed names in Thailand today. We think that they're quite crowded. We think they're quite expensive. We think, dare I call it, "the tourist trap." You get a lot of people who want to think that they're in Vietnam and maybe don't have the bottom-up expertise, the number of analysts that we have, and just buy something that's got Vietnam in the consumer name and the title. We do think there's some great stories in infrastructure, some of the steel stocks are looking very exciting. We're still big believers in physical retail. We talked a little about e-commerce, but in Southeast Asia, physical retail, the development of shopping centers is still an incredibly important part of development. So we do see Vietnam at a very early stage in terms of the formalization of retail. And there's some exciting thematics that we follow from elsewhere. We talked about pharmaceuticals, the penetration of the auto industry, scooters to four-wheelers is very important.

James Johnstone (38:35):

So we think Vietnam is an incredibly exciting part of our portfolio. Obviously it's a much bigger part of our frontier market portfolios than it is of our emerging market portfolios for those reasons that you say, but today the market is about a $200 billion stock market. It's down from its peak, but that still puts it at about 60% market caps GDP. As I said earlier, we can go into more detail, but the ASEAN markets have performed pretty poorly for the last 10 years, but definitely Vietnam, we think is one of the most exciting going forward. But we do think you need to have very good bottom-up information to find the real long-term winners, not the winners of the last 5 years.

Greg Dowling (39:13):

Yeah. But aren't there liquidity issues?

James Johnstone (39:17):

Again, unfortunately this comes back slightly to the predicament that we find emerging markets in. The frontier markets were very popular in the period post the EM rally. If you think back to how EM works, really, there've been three great phrases of the EM rally over the last 30 years. One was in the runup to '97. Then you have the '02 to '08 rally. And then you had that very sharp rally post the financial crisis. But EM as a broad index was pretty flat over the last 10, 12 years. And obviously within that you had huge winners out of the Chinese internet, some of the North Asian names, but it's been quite polarized where the success has come from. Frontier took off late 2011, 2012. But if I just give you some brief numbers, I think it explains quite a lot how difficult Vietnam has been.

James Johnstone (40:05):

There was $60 billion of frontier money in 2014. Now, if you imagine 10% of that, for example, was in Vietnam, that was $6 billion of foreign money in Vietnam. The index has changed and we've had various additions and exclusions, but overall let's just say frontier funds have gone to 20% in Vietnam, which is kind of roughly where we would be. Unfortunately, frontier AUM has dropped to $5 billion. So that's a spectacular 90% decline, which the bulk of it is actually redemptions, not market moves. So 20% of $5 billion is only $1 billion dollars. So if you think about it, foreigners have been poor sellers of $5 billion of Vietnamese equities over the last 3 years in a market that might trade to $220 million a year. Now that leads on to an amazingly good point, which I'm very glad you brought up.

James Johnstone (40:55):

What do we really look for in a market? What we really want in a market is a country that can drive its own capital requirements. We spend a lot of time pontificating about international flows of money, but in reality, the success of Japan, the success of Korea--once you've had the initial FTI to get it back on its feet, the vast bulk of the capital required is internally generated. Because what we are really trying to achieve is have governments in place that when you earn your first peso, rupiah, ringgit, you don't buy a dollar. And obviously the problem Asia faced in '97 and '98 when you have that spectacular implosion of the economies driven by fixed exchange rates falling anywhere from... In Indonesia, the rupiah fell from 2000 to the dollar to 18,000 to the dollar in a very short period of time. But as you begin to have very stable economic backdrops--and '97 and '98 really set ASEAN up and Asia up for this long-term success period--that leads to the creation of domestic pension funds. You want people to have a Chilean, Australian-style pension fund industry where you are forced to contribute monthly so that you have your assets and liabilities match.

James Johnstone (42:04):

So like in countries like Europe or Italy or the UK where you have huge unfunded pension fund liabilities, what does that achieve? That achieves ultimately a very substantial amount of domestic capital that allocates between fixed income and equities on a monthly basis. And Vietnam wasn't big enough to absorb that. Vietnam's domestic pension fund industry, unlike Malaysia's or unlike the beginning signs that we're seeing in places like Thailand, just wasn't big enough. So that partly created the collapse of the bubble in Vietnam. As I say, as you begin to see the creation of these domestic pension fund pots... Singapore is now where 80% of GDP is in pension funds, Malaysia is at 60%. Malaysia is a market that we like it from a macro perspective, but it's often hard to find stocks that hit our growth at a reasonable price valuation, just because the nature of the pension fund, the streamings, you've got a constant bid coming in from local money.

James Johnstone (43:00):

So that's what we like. We like countries where they're going to buy their own markets. Where you are going to have Robin Hood every day, not just once every 10 years. So the Philippines is low, Vietnam is very low. So that's what kind of partly offset Vietnam. But, again, it comes to the point that Tencent is a $700 billion company. Tencent is a company that is up there with an Apple and Microsoft and can give you infinite liquidity. You will not find infinite liquidity in Vietnam. And in reality these days, you won't find infinite liquidity in places like Indonesia or even in Thailand. Thailand will turn over $1.8 billion a day, but that's still a fifth of what Tencent can turnover on a bad day. And relative to China, it's a mere fraction. Southeast Asia, because of the underperformance and because of the retreat of indices, has become a less liquid part of the universe.

Greg Dowling (43:55):

Political instability and currency instability kind of go hand in hand. Any countries we need to be watching closer?

James Johnstone (44:01):

Well, talking about political stability from the UK, seems a bit of a... It's difficult for me to be objective [laughs]. One of the reasons I did emerging markets and one of the reasons that people pushed emerging markets 25 years ago was we believed in the convergence. Now, I think most people thought that emerging markets would converge upwards to the sunny uplands of political probity and corporate governance that the Western democracies displayed. I would argue that possibly the Western democracies have slipped a little, and we've seen a convergence maybe lower down than we expected, but definitely the convergence, the corporate governance, the ESG standards across emerging markets are infinitely better than they were 30 years ago. But of course you will always find there is political risk. We watch very carefully for transitions of power. We spend a lot of time meeting politicians to understand who has the Lee Crime Yu vision to drive their country forward. And you can map, very closely, successful economies and successful markets to successful politicians.

James Johnstone (45:00):

You look back across big EM countries like Turkey and Russia under the initial five, seven, eight years of strong leadership did very well. The markets did very well as strong leaders put in place the right economics, but oftentimes in some of these countries the leaders have stayed for too long. It is incredibly important. Thailand has been a pretty successful economy and a pretty successful stock market despite having had, I think, well over 30 military coups in the last 100 years. And so I think you have to have a fair degree of expertise and understanding. You wouldn't want to just start investing in Thai companies from scratch and a military coup takes part. It's a little bit scary. But on the whole, I think if you look at politics today versus 30 years ago, we're in a much better place.

James Johnstone (45:47):

In the Philippines there's a long-term president. The president of Turkey has been a pretty strong leader and has done some very good things and arguably not some great things. But on the whole, we haven't moved away from pure democracy in most of these countries, or at least a successful transition of power. You know, Southeast Asia really has learned it's lesson, as I think did big EM--and in particular Asia--in '97 and '98. That was the last big currency collapse. Now we don't have an Argentina or a Turkey or a South Africa in Southeast Asia. We have some weak currencies. Indonesia has been a weaker currency over the last 10 years. Arguably, Indonesia has lost 30% of its value in the last 10 years. And the other bad-performing ASEAN currency has been the ringgit, but purely because they're mainly commodity-driven currencies. Indonesia lost its big coal exports, the coal price collapsed.

James Johnstone (46:45):

There's a few reasons coal became less popular. You've had a weaker commodity environment since the peak of '12. Oil prices obviously have been much more important for the ringgit and obviously that big oil price collapse we had in late 2014 helped for that. If you look at currencies that were absolutely clobbered in 1997--the Thai baht, the Philippine peso--these currencies have actually appreciated. Thailand runs a 6% current account surplus. The Singapore dollar is now seen as a store of value. And so it's still very much--we apply a very strenuous top-down process. Our economists will spend a lot of time looking at fiscal deficits and current account deficits and looking at terms of trade, but in reality, the ASEAN currencies haven't been as bad as the JP Morgan Emerging Market Currency Index, for example, where you still have had some dangerous, difficult times in countries like Argentina, Turkey, Egypt, for example, where you've had very significant devaluation. So on the whole, reserves are much higher than they've ever been before. You've got much more economically literate central banks who've been given much more independence by politicians, and you've really built up into pretty mature, stable economies, still on the growth sector growth path, but with substantially better on central banks. We forecast currencies. We want to avoid currencies when they appear to be too weak, too overvalued. But in reality, the vast bulk of ASEAN is not in the same camp as some of the more volatile EM currencies and country currencies that you'd find in South America or Africa.

Greg Dowling (48:20):

Alright, you're selling us on the importance of ASEAN. How should investors access this? Should it be a standalone allocation or is this something they'd pick up as part of an EM or frontier broad allocation? What about being more active versus passive in this area?

James Johnstone (48:38):

Honestly that's the ultimate question. I show my age when I say that when I started in '96, ASEAN was over 30% of the EM index. Thailand and Malaysia alone are about 25% of the index. Obviously that predates the dramatic rise of North Asia, the emergence of Korea--it's now the eighth largest economy in the world--Taiwan with its tech industry. They have underperformed, which is part of the reason that they've fallen as a percentage of the index. Obviously, the other point is that you've now got, I think, 3 of the top 10 companies by market capital in the world are now Asian: Tencent, Alibaba, and TSMC. And so they've naturally been squeezed as index representation. We are very index agnostic. We want to buy fantastic companies. And obviously there have been some phenomenal investments. We went through a couple earlier, Bank BCA in Indonesia has grown from $1 billion dollar market cap to a $50 billion market cap over the last 20 years.

James Johnstone (49:38):

So we do think that there are wonderful opportunities to be had within an emerging market fund, but the way that we look at ASEAN within a context of smaller emerging markets and next-gen, we have been more overweight with smaller markets, historically. Obviously the way markets have moved in 2020 has been more of a tech bias and tech disruption. So our allocation to ASEAN has fallen. But if you think there's only 5% of an EM fund, yeah, it's quite easy for us to be overweight. I do think there's a role to be played in funds which have more of a direct exposure to ASEAN and other small markets. With a small emerging market fund, a next generation fund, or a frontier fund, you're going to get bigger exposure. The correlation is less, presumably the income growth levels will continue to rise faster, and because of the sheer undervaluation of the last couple of years you've seen a very dramatic de-rating. Very much dependent on what the investor is looking for. A good emerging market fund will have a good allocation to ASEAN when it's going up. But we do think there's huge long-term value. We do think there's growth at a reasonable price in ASEAN. And we do think it plays a really important role in people's portfolios.

Greg Dowling (50:44):

Last question. So with a lot of these countries being islands or being countries that are surrounded by water, what's the impact of climate change and how are they going to pay for some of this?

James Johnstone (50:59):

I mean, this obviously has become one of the most important questions globally for all of us to be concerned about, and ESG and climate change is, again, a very important part of our process. Climate change as a theme has become an incredibly important part of the portfolios. As you say, it is a low-lying area. There are very significant flood defenses that need to be put on. That will be a very important part of infrastructure. If anyone who went to Singapore in the '90s went to Singapore today and hadn't been there for 30 years, they would get a bit of surprise. If you're lucky enough to stay in Raffles, which I'm sure you do, but I don't often get to stay in Raffles, but Raffles is on Beach Rd. If you walk out of the front door of Raffles these days in Singapore, the beach is about two miles away. So countries which are rich enough like Singapore, but in pretty solid flood defenses.

James Johnstone (51:45):

We're seeing that in big metro situations like Manila and Jakarta and Ho Chi Min. Obviously in Indonesia they're talking about even moving the capital to Kalimantam because the risk of Jakarta continuing to sink. But we're talking vast amounts of money. Now, ultimately that comes back to fiscal probity and the ability of governments to spend and borrow is an incredibly important part of what we're seeing. Obviously it doesn't just affect Southeast Asia. I mean, if you look at the eastern seaboard of the U.S. or you look at the eastern seaboard of the UK or China and there's very low-lying parts. Most of the bigger--even originally the port system of the 18th, 19th century. Again, we come back then to the use of green energy, the dramatic rise of renewables. I go to Vietnam and I see dramatic amounts of geothermal, wind, solar panels being put in--the cost-driven-down element of per kilowatt hour in solar and wind.

James Johnstone (52:41):

This is now a globally available technology. This isn't just being restricted to developed markets. And obviously the amounts being put in are pretty dramatic. And again, what we're talking about in many ways is the ability of these countries to leapfrog. A lot of these countries don't have to worry about having legacy grids, legacy systems. Rather they leapfrog the copper wire networks of the telcos and go straight to mobile. You know, a lot of these countries require dramatic increases in electricity production to be able to drive urbanization and industrialization. And if they can be doing that through green energy... Again, we've got a long ways to solving the elephant in the room, which is climate change. So yes, it's an incredibly important part of what we do. We do find some exciting opportunities within the green technology space.

James Johnstone (53:28):

We do see a huge amount of adoption. There is obviously still a residual element of fossil fuel usage. China obviously still has significant fossil fuel usage. Indonesia still requires to use coal to produce electricity to certain extent. And obviously the world is beginning to address that situation through bilateral communications. What we're seeing is market forces really being brought to bear on this now, combined with significant government subsidies and government expenditure. And so we're hopeful, I think as we all have to be, that over time the situation is stabilized at least.

Greg Dowling (54:02):

Okay. So the next time you are dining at Red Lobster or enjoying a Red Bull, just remember the importance of these ASEAN countries. James, thanks for being with us.

James Johnstone (54:12):

Thank you so much. My pleasure. Great to see you.

Greg Dowling (54:14):

If you are interested in more information on the topic, please go to our website where we will have a list of relevant FEG publications. And don't forget to subscribe to our communications at so you don't miss the next episode. Please keep in mind that this information is intended to be general education that needs to be framed within the unique risk and return objectives of each client. Therefore nobody should consider these FEG recommendations. This podcast was prepared by FEG; neither the information nor any opinion expressed in this podcast constitutes an offer or an invitation to make an offer to buy or sell any securities. The views or opinions expressed by guest speakers are solely their own and do not necessarily represent the views or opinions of FEG.


This was prepared by FEG (also known as Fund Evaluation Group, LLC), a federally registered investment adviser under the Investment Advisers Act of 1940, as amended, providing non-discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directly to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH 45202, Attention: Compliance Department. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of such information provided by third parties. The information is given as of the date indicated and believed to be reliable. FEG assumes no obligation to update this information, or to advise on further developments relating to it. Past performance is not an indicator or guarantee of future results. Diversification or Asset Allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss. The views or opinions expressed by guest speakers are solely their own and do not represent the views or opinions of Fund Evaluation Group, LLC.


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