When China sneezes, the world catches pneumonia, as recent stock market gyrations seem to indicate. But some Asian countries have inoculated themselves against being overwhelmed by the Chinese dragon, and the best examples of how emerging markets countries are able to succeed lie in Southeast Asia.
Thailand and Vietnam, both members of the Association of Southeast Asian Nations (ASEAN), walk a tightrope between China and the United States. While supplying China's need for raw materials, value-added tech and consumer goods enables them to build domestic industries and infrastructure, Thailand and Vietnam see the importance of retaining strong economic relations with the United States in view of an increasingly nationalistic China.
There are two markets in Asia. One is China. The other is the ten-country ASEAN trade group. China was ASEAN's fourth-largest trading partner in 2007; the EU and US numbers one and two, respectively. But after the West's 2008 collapse, China became the ASEAN’s largest trade partner as inter-Asian trade increased from $170 billion in 2007 to $320 billion in 2012.
This is what makes investing in Asian markets such a challenge today. China's 1980-2010 on-average growth of 10% per year led the ASEAN countries to sell to China and take advantage of the boom. Simultaneously, China's 1999-2013 military spending increased an average of 12.45%, with much of it spent to protect Chinese influence in ASEAN waters. The question today is this: How can the ASEAN countries continue to co-exist with China and prosper in the face of a Chinese foreign policy whose goal is to control inter-Asian trade?
The answer is both country-specific and regional.
Thailand has built a diverse industrial base with buyers world-wide. Known as an Asian “Tiger Cub,” the Thai economy is export-oriented, with exports making up 65% of its GDP. Thailand’s exports are primarily manufactured goods such as electronics, vehicles, machinery and equipment, along with agro-foodstuffs such as rice, fruit, frozen seafood and rubber. Their export markets are nicely balanced. In 2012, Thailand’s trading partners were China (12 %), Japan (10%), the US (10%) and the EU (9.5%), plus Malaysia, Australia and Singapore. Major American, EU and Japanese multinationals such as Dow Chemical, Toyota, AstraZeneca and Bristol-Myers Squibb have facilities in Thailand that sell into the Thai market, nearby ASEAN countries and worldwide.
US investor access to the Thai market is available through the 55 Thai companies trading on the OTC, which include Thai Airways International (TAWNY) and Thaicom Public (THMNY); three ETFs and several funds, including the iShares MSCI Thailand Investable Market Index Fund (THD), the Thai Fund (TTF) and the Thai Capital Fund (TF); and now the DMS Thailand Select 33 Index Fund, which mirrors the NASDAQ Thailand Select 33 Total Return Index (NQTHS33).
In 2013, politics trumped business as anti-government protests led to the recent inconclusive election. The Thai Stock Market's (SET) benchmark index fell 6.7% in 2013, after surging 35.8% in 2012, and the Exchange also saw $6.2 billion of net foreign selling on the year, erasing $2.5 billion of net foreign buying in 2012.
The underlying strength of the Thai industrial base has enabled the Thai baht to keep its value; dropping only 4.25% (as of 2/13) against the US dollar in the past three months. With 88% of their exports going to non-China destinations, Thailand most definitely represents an investment opportunity for those with a long-term perspective.
Unlike Thailand, Vietnam shares both a common border and common animosity with China. Distrust of China tends to run deep among the Vietnamese; a result of three hundred years of armed conflicts, including China's 1979 invasion of Vietnam that killed an estimated 40,000 on both sides.
Hanoi has struck a balance in its relationship with Beijing, maintaining a degree of distance but also capitalizing on opportunities for mutual cooperation. Vietnam agreed to develop resources with China in the Gulf of Tonkin, despite outstanding disputes over their exclusive economic zones, and simultaneously being one of the negotiating parties to the Trans-Pacific Partnership (TPP) free trade pact.
The strategy has proven successful. Vietnam's GDP grew 5.54% in 2013, up from 5.2% in 2012. Vietnam’s major export markets are the EU (1), US (2), the ASEAN countries (3), Japan (4) and China (5). Vietnam's 2012 exports were 41% industrial, 22% agricultural, and seafood and the remainder energy; exports to the US are primarily garments, furniture and seafood.
Vietnam is booming. Its 2012 per-capita income is US $1,595, versus neighboring Cambodia's $945, and it is deliberately becoming very US-friendly. Vietnam Airlines has a code-sharing agreement with American Airlines that allows easy movement to Japan, Europe and the US. It also has four deep-water ports that provide access to neighboring Asian markets, North America and Europe. Vietnam has two western-modeled stock markets, one in Hanoi and the other in Ho Chi Minh City. New car sales in Vietnam rose 19.4% in 2013 and the Vietnam Automobile Manufacturers Association is forecasting a 9% increase in 2014.
Unfortunately, investment opportunities in Vietnam are limited. The lone ETF is Van Eck's Market Vectors Vietnam ETF (VNM), which owns shares of 29 industrial, financial and oil-gas-energy companies. Two Vietnamese companies provide investment opportunities for intrepid investors. Dragon Capital, which claims to be the second-largest investor in the Vietnamese stock market after the Vietnamese government, offers two funds. Vietnam Asset Management Limited offers four Cayman-registered Vietnam-specific funds, which are open to public and institutional investors globally; American investors need to meet SEC regulations.
Foreign direct investment in Vietnam is growing. In 2012, the top three countries investing in Vietnam were Japan, with 378 projects worth US $5.13 billion; Singapore, with 138 projects worth US $1.72 billion; and South Korea, with 332 projects worth US $1.17 billion.
By finding a mix of products needed by both ASEAN and Western markets, Thailand and Vietnam are successfully side-stepping the Chinese juggernaut.