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 This document has been issued and approved by Alquity Investment Management Limited which is authorised and regulated by the Financial Conduct Authority. This document is a marketing communication and is intended solely for distribution to investment professionals as defined in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion Order) 2005. If you are an individual who would like more information about Alquity’s Funds, please go to www.alquity.com. The Alquity Africa Fund, the Alquity Asia Fund, the Alquity Future World Fund, the Alquity Indian Subcontinent Fund and the Alquity Latin American Fund are all sub-funds of the Alquity SICAV (“the Fund”) which is a UCITS Fund and is a recognised collective investment scheme for the purposes of the Financial Services and Markets Act 2000 of the United Kingdom (the “FSMA”). This does not mean the product is suitable for all investors and as the Fund is invested in emerging market equities, investors may not get back the full amount invested. This document has been provided for information purposes only and does not constitute an offer or solicitation to purchase or sell interests in the Fund. The information contained in this document shall not under any circumstances be construed as an offering of securities in any jurisdiction where such an offer or invitation is unlawful. The Fund is currently registered for sale in a limited number of countries and the Prospectus should be referred to before promoting a share class of a sub-fund as promotion of the Fund where it is not registered may constitute a criminal offence. The current prospectus and simplified prospectus are available free of charge from Alquity Investment Management Limited, 5th Floor, 9 Kingsway, London, WC2B 6XF or by going to www. alquity com. 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. Contact us on +44 207 5577 850 or email a member of our Sales 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 [email protected] Latin America & Europe Benoit Ribaud [email protected] UK & Middle East Steven Williams [email protected]