When my Blackthread group of investors soon visits Singapore, we’ll begin our adventure with a Tiger beer at the famed Raffles Hotel’s long bar. Built in 1887, the hotel reeks of colonial ambiance and is named in honor of Sir Thomas Stamford Raffles, who founded the trading port of Singapore in 1819 with William Farquhar.
During the long flight to Asia, I’m encouraging members to read Victoria Glendinning’s great new biography, Raffles: And the Golden Opportunity. Raffles was an ambitious political entrepreneur keen on offsetting growing Dutch influence in the region from its base in Indonesia’s island of Java. Acting on his own initiative, Raffles wisely decided on the island of Singapore and then signed a treaty of friendship and alliance with the Sultan of Johor just nine days after landing.
Singapore was a huge economic success from the start, being a free port with no customs duties and open to ships from all nations.
But Raffles would still be amazed if he were to come back today and see what Singapore has become.
Only one-fifth the size of Rhode Island and three times the size of Washington, D.C., Singapore is the “Switzerland of Asia,” boasting the world's biggest budget surplus relative to economic output. It is perhaps the most strategically important global trading, finance and service hub in Asia.
Singapore is the busiest port in Asia, situated next to the vital trading channel of the Straits of Malacca, through which 37 percent of global shipping and 80 percent of China’s oil pass. Singapore’s annual trade volumes are a stunning four times the size of its economy.
It is one of only seven countries in the world to enjoy an AAA credit rating. Surprisingly, some firms are moving manufacturing centers from China to high-cost Singapore due to its infrastructure, logistics and laws protecting intellectual property.
Singapore is a good proxy for many investors, as its companies invest heavily in neighboring countries. Over dinner with the CEO of Singapore’s premier private bank, our discussion seemed to move back and forth like a ping-pong match between the challenges facing America and the incredible boom in Southeast Asian wealth.
An Opportunity For Catch-Up Profits In Vietnam
If Raffles were a young man today, he no doubt would head to a country like Vietnam for fame and fortune. Why? A just-released report from the Union Bank of Switzerland (UBS) does a nice job making the case for investing in Vietnam right now.
This country of 93 million is bursting with youthful energy, with 50 percent of its tech-savvy citizens under the age of 30. Its manufacturing wages are half that of China, which is why foreign investment is steady and Samsung makes half of its cell phones here. Comparing Vietnam with Singapore is a bit of a stretch, but middle-income Thailand is a good catch up target. Right now, only 1.7 percent of Vietnamese own a car, while in Thailand the figure is 40 percent. Per capita GDP is 60 percent higher in Thailand and the market value of Thai publicly traded companies is eight times higher.
All this highlights why Vietnam’s exports have tripled in U.S. dollar terms since 2007. Its exports to North American markets are up an amazing 30-fold since 2000.
Meanwhile, the country’s macro situation has markedly improved. Inflation, running at 20 percent just a few years ago, is down to 2 percent. Interest rates have fallen from 15 percent to 6 percent, property markets have stabilized and credit growth is up. The Tran-Pacific trade deal winding its way through Congress is estimated to boost Vietnam’s economy by 14 percent over the next five years.
Despite this progress, Vietnam’s stock market is still off 51 percent from its high and trading at just twelve times earnings. The current market value of all publicly traded companies in Vietnam is 30 percent of GDP, while Thailand and the Philippines are trading at 95 percent and 115 percent, respectively.
These gaps will not last forever, so I encourage you to take action by blending Vietnam into your global portfolio. But you’ll need a fund manager on the ground in Vietnam with the flexibility to invest in medium-sized companies instead of just the five largest companies that dominate the market.
For these reasons, I suggest that you take a good look at Asia Frontier Capital’s (AFC) Vietnam Fund.
This fund is up 40 percent since its launch in early 2014 and its current holdings trade at just a bit over book value and 7.4 times earnings and a nice current dividend yield of 5.8 percent. I also like its concentrations in consumer companies (29 percent) and industrials (22 percent).
The strategic importance and commercial opportunities presented by Southeast Asia are far greater than currently recognized by investors. The region represents the seventh-largest economy in the world, with 600 million consumers and rising incomes fueled by steady 5 percent economic growth.
America’s competitors are all over this region, which is why I call it the sweet spot of Pacific Rim growth and the cockpit of global competition.
No wonder a wall of capital is seeking opportunities to catch.
Carlton Delfeld is managing director of Chartwell Partners, an alternative asset advisory firm, and vice chairman of the Pacific Economic Club. He can be contacted at carl@blackthreadgroup.com.
