The Southeast Asian region spans more than 10 countries, has a population of about 500 million, and a total area of 4.5 million square kilometers. It has a combined gross domestic product of US$737 billion, and a total trade of US$720 billion (according to figures provided by the Association of Southeast Asian Nations or ASEAN Secretariat). The largest economies in this region are Singapore, Thailand, Indonesia and Malaysia. While the region is often overlooked by international investors, its economies have been growing steadily. Their markets also offer aggressive investors the opportunity to reap potentially high returns. For example, in 2004, the Indonesian bourse was one of the top performing markets in the region. Although some markets in Southeast Asia have run up of late, their valuations and strong fundamentals make them interesting options for investors. Below are extracts on Southeast Asia taken from our bi-weekly update.

1) Attracting Funds Back To Indonesia

Indonesia's new government led by Bambang Yudhoyono told investors that poor infrastructure has been hindering the influx of investments. Recently he noted in a speech that "infrastructure is a key driver for prosperity". In order to improve the infrastructure in Indonesia, the government said that it would need as much as US$150 billion worth of investments in roads, power plants and other infrastructure projects for the next five years. Besides improving infrastructure, the investments could also help in accelerating the pace of growth in Indonesia and to create more jobs. According to a Bloomberg report dated 17 Jan 2004, the government expects to be able to finance US$60 billion of this infrastructure spending but is relying on overseas and domestic investors to participate in projects amounting to US$90 billion.

A look at the JCI and its estimated Price Earning ratios since 1995 shows that market valuations have been relatively suppressed especially since the currency crisis that largely dampened investor's confidence on the Indonesia market. According to a recent presentation by Fidelity Investments in a Hong Kong seminar, they had forecasted an expected earnings growth of 14.4% for Indonesia in 2005, which is relatively healthy. Low valuations and healthy earnings growth are strong fundamental factors for the market.

Fund managers add that because the Indonesian market is largely overlooked by investors, many good quality Indonesian companies are under researched. This provides fund managers an opportunity to unearth gems, especially those stocks that have exposure to domstic demand. This is a significant point considering that Indonesia has a sizeable, growing middle class.

To date, foreign investors remain wary of investing in Indonesia due to the political and country risks related to terrorism, lack of corporate governance and riots. The Indonesian stock market has historically been volatile, and the threat of instability is nothing new. During the Asian financial crisis the Jakarta Composite Index dropped 35.5% in 1998, but staged an impressive comeback the next year rising 95.1%. In 2000 it fell again by 51.6%, and then rose 68.2% in 2003.

2) Malaysia & Singapore - exports still growing

According to International Enterprise Singapore, exports rose 8% year-on-year in Dec 2004. Overall electronic exports grew 8.3% and semiconductor shipments rose 7.9% during the same time period. Both export components slowed down from previous growth rates of 20% and 33% respectively in Nov 2005. Malaysia's export growth figures tend to be closely correlated to Singapore. The correlation since 1999 is about 88%. Malaysia's report on exports is typically one month behind that of Singapore. Malaysia's exports grew 16.9% year-on-year that is comparable to Singapore's export growth rate that month of 16.5%. Growth was largely driven by shipments of electronics and crude petroleum. However, there are signs of exports growth slowing down for the couple of months ahead.

A report from Bloomberg (on 17 Jan 2004) stated that the reason for the expected slowdown in growth would be the deceleration of growth in demand for electronic products from the US and China. However, after very strong growth in exports for the last two years (2003 and 2004) a deceleration in growth is not surprising. We think that the demand for electronic exports (which accounts for more than 50% of Singapore exports) might improve in the latter half of 2005 and the pessimism on the slowdown in export demand might be overdone. For Malaysia, a boost in exports might come from crude petroleum shipments. In Nov 2004 it grew by 65% year-on-year. Palm oil as another alternative for petroleum oil is also getting popular with oil importers; it grew 15.4% during the same period.

The Singapore market is currently trading at an estimated price earnings ratio of 15 times, and the earnings growth is 10.2% for the year 2005. Considering that the historical average range of the PE valuation is 16 to 18 times, the current valuation is slightly below the historical average. Based on our research opinion, the outlook for the Singapore equity market is positive and there is upside potential in the market. We project that the Singapore market has the potential to rise up to 3,000 points by the end of 2006.

3) Thailand Elections 2005

In 2004, the Thailand market was the worst performing market among its other Asian counter parts. It was down 15.33% last year. A couple of events including the bird flu outbreak, riots in the Southern part of Thailand and the Tsunami actually made market sentiment less positive than before. However, the coming election in February is seen as one positive factor for Thailand. Incumbent President Thaksin Shinawatra is expected to win rather easily. Some of the positive moves that his government might take include liberalizing Thailand's broadcasting industry, privatising its electric utility and simplifying a complex system of concession agreements for Thailand's telecommunications companies. They may also start up a series of infrastructure projects such as building railway lines and overhead bridges in Thailand.

Conclusion

South East Asian (SEA) Economies including Singapore, Malaysia, Thailand and Indonesia have been experiencing strong growth in the past two years. Export growth and domestic consumption were the two main drivers behind these SEA countries but now there are now concerns about a slowdown in these drivers. But there's more upbeat news as well, including the investment drive in Indonesia, the coming elections in Thailand and the growth of petroleum exports in Malaysia. We carry two South East Asia equity funds including the Legg Mason Special Situations Fund and the OCBC South East Asia fund. The Special Situations Fund invests in undervalued restructuring plays that have been largely ignored by the market.

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