The Asean region is a fairly large economic bloc today in terms of GDP (gross domestic product) and is expected to be among the top five in the world over the next 15-20 years. From an investor's perspective, the Asean bloc offers a consumption theme with a strong overlay of commodities, tourism, infrastructure, capital expenditure, currency and growth emanating from China.

Singapore, Indonesia, Malaysia, Thailand and the Philippines are core of the Asean, while Vietnam, Brunei, Lao PDR, Cambodia and Myanmar are the satellite countries.

Demographic dividend

Like India and China which boast of a population of about 1.2 and 1.3 billion people, ASEAN also has a fairly large population of about 600 million people growing rapidly.

In that context, the region offers a rich investment opportunity due to its strong demographic dividend. A young growing population with strong income levels and low consumer debt-to-GDP are the growth drivers .

While domestic consumption is a dominant theme, it is not the only one. ASEAN contributes to 87 per cent of world's crude palm oil production and 82 per cent of the world's rubber production.

In addition, Indonesia is ranked third amongst the world's top five regions with the highest overall mining potential; Freeport in Indonesia is the world's largest gold mine in terms of reserves; Indonesia is the world's largest thermal coal exporter, Indonesia and Malaysia are the world's largest two countries in terms of LNG exports.

In summation, the region is rich in natural resources including precious metals which do contribute to economic growth in the long term.

Tourism potential

In terms of tourism, the region is fairly well known to most people in Asia including India. While the entire region offers a strong tourism play, it is worthwhile to note a couple of interesting facts about Singapore and Thailand. Singapore is the only developed market in the Asean bloc and in addition to being a big play in terms of private banking, the country also offers a very powerful tourism story. Gaming and entertainment resorts attract many to Singapore not only from the Asean region, but also from other parts of Asia and the world. Tourism industry in Singapore (in terms of arrivals) is expected to grow by more than 20 per cent year on year over the next few years.

In addition to tourism, Thailand offers a very strong rural consumption story. The genesis for this is that land ownership rests with the citizens and increase in prices of commodities (as witnessed in the last couple of years) obviously benefits the owner of the land. The new government's (elected in July '11) as well as the previous government's policies are/were mostly centered on rural prosperity.

Fiscal management

While most countries in the world were affected by the global financial crisis of 2008, Asean countries faced an equally severe crisis during the Asian financial crisis of 1997. However, fiscal management and implementation of austerity measures have seen these countries moving from a “fiscal deficit” situation in 1997 to a “fiscal surplus” situation now.

Central bankers in the Asean region have reacted slightly differently in handling “inflation”, a problem which surfaced across the world recently, especially in emerging markets. While most central bankers use interest rates as a primary tool to combat inflation, Asean central bankers have used a combination of interest rates and currency appreciation as means to combat inflation. As a result of this, most Asean currencies over the last 12-18 months have appreciated against the US dollar.

The Asean has been one of the top performing regions from a stock market returns perspective.

It is not a short-term phenomenon alone as the region has delivered performance over the medium- to the long-term as well. Asean has also delivered returns with lower volatility relative to India and does not have a strong correlation to India (0.50 to 0.75).

From a valuation standpoint, the current valuations are cheaper than the 5 years average with strong earnings growth as per IBES aggregate estimates. Even as these countries are not immune to the current turmoil in the financial markets, the underlying economic fundamentals of Asean remain strong.

These countries offer a diversified set of investment themes which have played out in the past and are expected to do so in the future as well.

(The author is Head- Retail Sales, J.P. Morgan Asset Management. The views expressed herein are personal views.)

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