REFORM IN ASIA

MIKE SELL
Head of Asian Investments
REFORM
IN
ASIA
THE NEW STORIES FOR ASIA
Over the last few years, momentum for reform
has largely stopped or even reversed in many
Asian countries. This is now changing - and
is unrecognised by investors and market
commentators.
Over the last 20 years, investors
have been attracted to Emerging
Markets by 2 factors; faster growth
than Developed Markets, and the
opportunities that have arisen as a
result of structural reform and restructuring.
Although growth has slowed, it has
consistently remained faster than in
Developed Markets. It is the slowdown (and reversal) of reform from
Russia to India and from Brazil to
Indonesia that has disappointed investors. This has led to the exodus
from the asset class - with US$34bn
billion leaving since 2010.
However, throughout Asia, reform is
now returning.
INDIA
India’s potential for reform has perhaps had the greatest amount of
attention, following the election of
Narender Modi earlier on this year.
There has not yet been any big bang
reform, which has been a disappointment to some, but Modi has made a
solid start and is focusing so far on
fixing numerous structural impediments.
His inaugural budget included announcements on greater permissible
foreign investment in insurance and
defence, as well as a visa on arrival
scheme. Amendments to the Factories Act and the Apprenticeship Act
will result in greater labour market
flexibility. Furthermore, planning restrictions on new investment projects
have been relaxed, and the lethargic
bureaucracy have been forced to
raise their productivity and approve
numerous investment projects that
have been stuck in limbo for lengthy
periods. For example, INR 400 billion
of road building projects have now
been approved.
INDONESIA
In a similar vein, the election of Jokowi in Indonesia will also be the catalyst for much-needed structural
reform. The most pressing issue to
be tackled is the subsidisation of
fuel, which costs the government
US$20bn a year (13% of total government spending!) and is unsustainable
in the medium term. Discussions are
already progressing on this subject,
even before Jokowi’s inauguration.
Jokowi’s team have also stated their
intention to boost infrastructure
spending, reduce bureaucracy, restart the privatisation programme
and ensure that cabinet ministers are
professionals, rather than political
cronies, and untainted by corruption.
PHILIPPINES
Although the Philippines has received much less attention, the
achievements of President Aquino
since 2010 should not be understated.
The focus has been to provide a conducive environment for the private
sector to participate in infrastructure
building, and this has been achieved
through the use of PPP, resulting in
the highest level of spending for 15
years (see Chart A). This has been
achieved within the context of overall
fiscal consolidation, following tax reform in 2004 (see Chart B). Further
measures have included increasing
‘open skies’ for airlines and allowing
further foreign investment into the
banking sector.
VIETNAM
Vietnam is also undertaking reform
after a period of hiatus. The Vietnam
Asset Management Company was
Reform is breaking out throughout the
region, which we believe will be an
important catalyst for flows returning
to the asset class and which is not yet
appreciated by investors.
CHART A: Philippines Infrastructure Spend
CHART B: Philippines Public Debt
3.0%
90
80
2.5%
70
2.0%
60
1.5%
40
50
30
1.0%
20
10
0.5%
0
19
9
20 9
0
0
20
0
20 1
0
20 2
0
20 3
0
4
20
0
20 5
0
6
20
0
20 7
0
20 8
0
9
20
10
20
11
20
12
20
13
0.0%
0
1/
0
1/
0
0
3
1/
0
1/
0
0
4
1/
0
1/
0
0
5
1/
0
1/
0
0
6
1/
0
1/
07
0
1/
0
1/
0
0
8
1/
0
1/
0
9
0
1/
0
1/
10
0
1/
0
1/
11
0
1/
0
1/
1
2
0
1/
0
1/
13
REFORM
IN
ASIA
Infrastucture Spend (% of GDP)
set up in 2013 and has begun buying
bad debts from the banks, so they
can start to lend again. Furthermore,
the government has introduced regulations to force State Owned Enterprises to divest their property and financial investment holdings by 2015,
and additionally intends to privatise
432 companies in 2014-16.
MYANMAR
Myanmar (Burma) is perhaps the
most extreme example of reform in
the region, as the process is literally
starting from scratch.
The country has largely stagnated
since independence, but the potential of this nation of 60 million people is vast. The government has now
begun both political and economic
liberalisation (for example, allowing
foreign investment into the telecoms
sector), and whilst the path is sure
not to be smooth, we believe there
will be no return to the dark days of
military dictatorship and a non-functioning economy.
It is for this reason, the largest holding in the Alquity Asia Fund is Yoma,
a property and consumer company,
with excellent corporate governance.
sector investment, and to improve
asset returns and corporate governance. None of these reforms will have
a major impact on the economy in
the next year or two, but are vital for
China’s long term growth potential.
CONCLUSION
Reform is breaking out throughout
the region, which we believe will
be an important catalyst for flows
returning to the asset class and
which is not yet appreciated by
investors. Alquity’s strategy of
focusing on the next story, rather
than the last one, results in our
Asian Fund being positioned to
take advantage of this opportunity,
with our 3 largest country holdings
being India, China and Vietnam.
Public Debt (% of GDP)
Sources: Bloomberg, CEIC, DBM, Morgan Stanley
Research
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WANT TO KNOW MORE?
CHINA
Finally, China is beginning to correct
a number of the structural faults in
the economy. The government had
already announced a relaxation of
the One Child Policy, which will partially help to slow the rapid ageing of
the population.
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Team:
Secondly, the standardisation of the
terms of the residential permit (the
hukou) between rural and urban citizens will encourage further and more
balanced urbanisation (which we believe is a key long-term investment
theme for China, and for the region
as a whole).
www.alquity.com
This has now been supplemented
by the announcement of reform of
State Owned Enterprises, with the
intention to separate ownership and
regulation, introduce more private
Asia
Stevan Tam
stevan.tam@alquity.com
Latin America & Europe
Benoit Ribaud
benoit.ribaud@alquity.com
UK & Middle East
Steven Williams
steven.williams@alquity.com