26 August 2011

An Original ASEAN Asset

• The ASEAN region comprises ten nations that form an important vertex of the triangle of Developing Asia. IMF expects Developing Asia to produce GDP growth of 8.4% in 2011 versus the world at 4.3%.
  
• ASEAN re-industrialisation, driven by core structural reforms,provides a timely message of the value of industrial policies to supplement monetary and fiscal policies.  
  
• On Thursday, Singapore’s Minister for Foreign Affairs said he “believes ASEAN can overcome the challenge of another global economic crisis”.
  
• Singapore Exchange provides access to an original asset class of ASEAN, the cash based, FTSE/ASEAN 40 ETF, that provides access to a selection of corporations that represent the growing ASEAN economies.

In the context of the global macro economy, the term ‘structural’ has been used in recent weeks as a suggested Euro area policy directive by the World Bank, OECD with a similar term coined by the IMF. The Northern Atlantic states of Europe and the United States have largely embraced the systemic issues which arose four years ago, and the anemic recovery which sprouted from green shoots two years ago, with expansionary fiscal policies, expansionary monetary policies before entering a phase of fiscal consolidation. There was the National Export Initiative in the United States, that aimed to double exports and create two million jobs in five years, however the architect of this structural policy has since moved on to take up the ambassadorship of China.

The fact that so many market commentators have been trembling with anticipation of what Federal Reserve Chairman Ben Bernanke will say, or hint at, into the conclusion of the annual Jackson Hole meeting demonstrates just how much emphasis is placed in the United States on monetary policy alone. Precipice parallels of the great depression have been made many times over the past four years, however how many investors can recall the names of any of the four Federal Reserve chairmen during the 1930s? One ‘structural’ fact that is worth mentioning is that during this time the United States built, rebuilt, or rejuvenated almost 8,000 bridges. These were bridges that linked local economies, assisting the facilitation of investment and local trade flows creating new jobs and multi dimensional economic opportunities.

Enter the structural policies of the ASEAN gradual economic integration plan that cater to the resources and capacity of each country while forming the ASEAN Economic Community (AEC) by 2015.The ten member states of ASEAN are listed in the table below with 2011 GDP growth estimates made by the IMF.

These growth numbers were last revised in June 2011 and headed by the statement that “Activity is slowing down temporarily, and downside risks have increased again.” It was also in June 2011 that the RBI’s Dr Subbarao stated that in a globalising world, decoupling does not work. Dr Subbarao made a distinction between trend and cycle decoupling and made the case that:

• trend decoupling is “reflected by the widening gap between the trend rates of growth of emerging market economies and advanced economies”. This is sustained by “the growing weight of domestic factors, mainly consumption, in the emerging market economies growth process”
  
• economic cycles were still coupled and economies should focus on ‘domestic drivers of demand and instituting automatic stabilisers’ to protect against the advent of a cyclical shock from advanced economies. This speech was included in the July RBI Monthly Bulletin.

In the context of the first aspect of Dr Subbarao’s thesis,  private consumption as share of GDP of ASEAN members Indonesia, Malaysia, Thailand, Philippines is estimated to be just under 60% of nominal GDP in contrast to the extremes of 35% for China and 71% for the United States.

In regard the second hypothesis, an important ASEAN structural policy directing the orientation of trade and investment flows of the region was brought into effect last year. This took the form of a free trade agreement (FTA) between the six founding members of ASEAN and China in 2010. This is the largest FTA in the world by population. The FTA has enhanced economic integration with this important trade bridge, cutting more than 90% of import duties, with a timeline for effect for other ASEAN members.

As for ASEAN in August, as reported by Channel News Asia on 25 August, Minister for Foreign Affairs K Shanmugam said he “believes ASEAN can overcome the challenge of another global economic crisis”.

The Original ASEAN asset: The FTSE/ASEAN 40 ETF

Singapore Exchange (SGX) provides access to the cash based, FTSE/ASEAN 40 Exchange Trade Fund (ETF) that was established as an ASEAN government initiative to position ASEAN as an asset class. This fund is designed to track the FTSE/ASEAN 40 Index, which comprises the forty top stocks by market capitalisation and adjusted for free-float across Indonesia, Malaysia, Philippines, Singapore and Thailand.

A long term price chart of the FTSE/ASEAN 40 ETF is illustrated below, with a loss of 11% made in the month of August 2011 to date and loss of 2.5% year to date.

Source: Bloomberg

The ETF is managed by CIMB-GK Securities Pte Ltd with CIMB Principal Asset Management Berhad as the sub-manager. The fund advisor is Barclays Global Investors and the market maker is Citigroup. It is ranked by market capitalisation, calculated in real-time every 15 seconds and denominated in US Dollars.

In terms of composition, of the ASEAN members the highest representation is made by Singapore and Malaysia at 41% and 29% respectively. In terms of Sectors, financials and telecommunications currently maintain the highest representations at 44% and 14% respectively.

Source: Bloomberg

Source: Bloomberg

This ETF in addition to the suite of ETFs that cover specific ASEAN countries aim to provide domestic and global investors with increased financial exposure to ASEAN markets in the form of a benchmark and tradable index.

The regional economy is dynamic and ASEAN Summits are now held once or twice a year by the same hosting nation. The last summit was held in Indonesia in May 2011, with the next summit scheduled for Indonesia again on 21-23 October 2011.

Specified Investment Products

As part of the Monetary Authority of Singapore’s (MAS) initiative to introduce stronger measures and enhance requirements to further safeguard the interests of individual investors, ETFs have been categorised as Specified Investment Products (SIPs).

SGX SIPs have structures, features and risks that may be more complex in nature. From Jan 2012, the MAS will require broking firms to ascertain whether an individual investor has the relevant knowledge and experience to understand the risks and features of SIPs before allowing the individual to open an account to trade SIPs listed on both securities and derivatives markets.

SGX has introduced two online initiatives, firstly a Customer Account Review Module and secondly an Online Education programme, to support individual investors in their understanding and trading of SIPs listed on SGX. Click here to access these initiatives.

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