Southeast Asia on Your GPS

Asia should remain attractive for investors this year, as the US and European economies struggle to keep growing, thanks to austerity measures to counter massive debt. 

That’s especially true of Asia’s emerging markets in the South Pacific, the so-called “ASEAN” countries (Association for Southeast Asian Nations), including Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

The ASEAN nations depend greatly on experts to China, the euro zone and the US, but their economies are being increasingly fueled by growth in domestic consumption as their middle classes continue to grow. And with China starting to show signs of stronger economic growth in 2013, exports combined with continued domestic consumption are likely to be a winning combination for many of these countries.

The region’s remarkable expansion of the middle class has boosted spending on education and health, as well as durable goods such as cars and household appliances. Consumer demand, for example, already accounts for some 55 percent of Indonesia’s GDP and 50 percent of Thailand’s.

Overall, Southeast Asia’s economic growth is expected to return to a robust pre-crisis average of 5.5 percent annually, over the next five years, according to the OECD.

By comparison, growth in China and India is expected to average 8 percent and 6 percent annually, respectively. While still very high, these rates are a couple of points lower from the pre-crisis period 2000-2007.

ETF Strategy

Most Southeast Asian exchange traded funds (ETFs) have been racing upward since last summer. And the longer-term outlook seems promising.

However, the ETFs focused on emerging Asian economies tend to be heavily concentrated and usually hold fewer than 50 different equities. Because of this, it’s best to invest only a smidgeon of your international allocation to them. It’s smart to buy a basket of three to five country specific ETFs in equal proportions. And it’s also probably wise not to chase last year’s front-runners: iShares MSCI Thailand (NYSE: THD), up 37 percent; iShares MSCI Philippines (NYSE: EPHE), up 33 percent in 2012, and Market Vectors Vietnam (NYSE Arca: VNM) up around 30 percent.

Better instead to focus on solid performers that are likely to do even better this year, such as Indonesia. And to also include the more developed economies of South Korea and Hong Kong.

Market Vectors Indonesia Index ETF (NYSE: IDX)

Zacks analyst survey ranks this Indonesian ETF as 2013’s most promising. The Indonesian market was up some just over 12 percent in 2012. And IDX is up about 15 percent in the past year.

With over 240 million people, Indonesia supplies an abundance of natural resources and consumer demand to the booming Asia. About 60 percent of the population is now considered middle class, and wages are rising. The gross domestic product of this nation of islands has grown some 6 percent annually since 2008, and industry is now some 42 percent of the $1 trillion economy.

IDX’s major sectors are financial services (27 percent), basic materials (20 percent), and consumer defensive  (16 percent). IDX recently broke above its 200 day moving average—a bullish sign.

iShares MSCI South Korea Index Fund (NYSE: EWY)

While the Korean market is up about 7 percent in the past year, this fund has gained almost 19 percent. By far, This ETF’s largest holding (23 percent) is Samsung Electronics (vs. 5 percent for the second largest holding).

Samsung is the world’s premier electronics company: consumers worldwide are snapping up Samsung’s smart phones, TVs, cameras, and other electronic paraphernalia. In my opinion, Samsung ranks as one of the world’s best investments.

Major sectors in EWY are technology (36 percent), consumer cyclicals (15 percent), industrials (14 percent), and financial services (13 percent).

iShares MSCI Hong Kong Index (NYSE: EWH)

The Hong Kong stock market is up around 25 percent in the past year, and this fund has gained just over 30 percent. Situated along the South China Sea, just off China’s coast, are the special administrative island regions of Hong Kong and Macau.

Hong Kong is for business; Macau is for pleasure. Macau’s casinos generated three times the combined revenue of Las Vegas and Atlantic City in 2011 and have been growing rapidly ever since.

It’s not surprising that this ETF’s largest holding is the real estate sector (33 percent) in the land-strapped region. Financial services (26 percent), utilities (12 percent) and Industrials (11 percent) round out holdings.

Singapore & Malaysia

To gain exposure to both Singapore and Malaysia, it’s worth considering Global X ASEAN (NYSE Arca: ASEA). This fund consists of 40 of the largest Southeast Asian companies, but close to 75 percent of its holdings are in Singapore and Malaysia, whose markets are up 16 percent and 12 percent, respectively, in the past year.

Gambling in Macau

A side note: If you wish to gamble but can’t make it to Macau, take a look at Melco Crown Entertainment Limited (NASDAQ: MPEL). It’s a pure play on the casinos there.

Bruce Vanderveen is a Florida-based freelance writer.

Tweet