South Asian equity markets made a solid start to 2019. Idiosyncratic economic improvements combined with a more dovish stance from the US Federal Reserve on the pace of future rate hikes, which is supportive of regional currencies. Frontier Asian economies are underpinned by some of the fastest GDP growth rates in the world, while favourable population dynamics are providing an added tailwind. This is translating into attractive investment opportunities across a range of companies, many of which are yet to be uncovered by mainstream investors. We recently got on the ground in three of these key Asian economies – Bangladesh, Myanmar and Vietnam.
Bangladesh: opportunities from economic reforms and population dynamics
Bangladesh is a country undergoing monumental change, with its economic and social indicators on the rise and effective government management of the economy. While the Bangladeshi taka appears overvalued and asset quality in the banking system appear weak, the country’s central bank has stable reserves of over US$30 billion, enough to cover seven months’ worth of imports; a surplus trade balance; and public debt of less than 35% of GDP. Enough to handle these weaknesses, in our view.
Economic reforms and population dynamics could prove monumental for the country’s growth prospects. Starting from a low base compared with Vietnam, Cambodia and India, economic reforms have strong potential to help Bangladesh evolve its export market, putting it in prime position to win low-cost manufacturing business from China. The designation of 100 special economic zones will also be a catalyst for economic growth, while consumer companies will feel the profound benefits of Bangladesh’s burgeoning middle class of nearly 19 million people, which is growing by more than 10% annually, according to Boston Consulting Group. Over the past decade alone, GDP per capita nearly doubled to over US$1,500 and adult literacy rates rose from 47% to 73% – a clear indication of strong social progress.
Industries that are expected to benefit from these reforms and population growth dynamics include health and beauty products, telecommunications and pharmaceuticals.
Myanmar: economic reform gathers momentum but clouded by political backdrop
Despite the recent political developments, as well as double-digit losses for the Myanmar kyat and a monsoon-induced spike in inflation towards the end of 2018, Myanmar is one of Southeast Asia’s fastest-growing economies, with an annual growth rate of 6 to 7%. Economic reform momentum in the country is beginning to pick up, with a rise in the rate cap for unsecured lending as well as an opening up of sectors, such as insurance and banking, to foreign competition. Having said that, risks do remain with non-performing loans thought to amount to 30 to 40%.
Welcome developments in Myanmar have been backed by an ambitious plan to attract over US$200 billion in FDI (foreign direct investment) over the next 20 years. During the 2018 fiscal year, net FDI flows increased year-on-year to US$4 billion, but it is clear that political developments in the country are affecting FDI with commitments reflecting current investment decisions down 14% year-on-year in 2018. Despite this, we anticipate the impact should be fairly contained, given continued investment from Singaporean, Thai and Chinese firms, which account for around 70% of fixed capital investment from overseas.
The real estate industry is likely to be a beneficiary of improving domestic consumption in the country and GDP growth. A focus on affordable housing for example will catalyze volume growth as a housing shortage and urban population growth provide a favorable backdrop.
Vietnam: urbanization and wage growth drive consumer demand
Vietnam’s GDP growth in 2019 is expected to be one of the strongest in the world at close to 7%, driven by consumption, urbanization dynamics, positive net exports and wage growth. The central bank has also proven very effective in maintaining inflation below the 4% target. Despite the potential impact on short-term aggregate demand from the US-China trade war, the country could in the medium-to-long term benefit significantly from supply chain movements.
Vietnamese banks are expecting a good year with significant earnings growth potential. Three trends are set to provide a tailwind: a continuing shift toward higher-yielding retail credit; positive asset quality trends, with many banks fully provisioned and offering widespread support for reducing non-performing loans; and increased profitability due to broader product offering. However, low capitalization levels, in light of the new Basel II rules next year, do remain a key concern. Given economic growth and rising wages, consumer-related companies in Vietnam are also expected to do well.
If economic growth in Bangladesh, Myanmar and Vietnam continue to outpace global averages, driven by the burgeoning middle class and rising exports, the opportunities for the long‑term investor to benefit are ample.
By Oliver Bell, portfolio manager of the T. Rowe Price Frontier Markets Equity Strategy