Global investors may be skeptical on investment into Southeast Asia, but emerging markets guru Mark Mobius told CNBC that he remains extremely bullish on the region.
"I'm still extremely optimistic on emerging Asia, especially Southeast Asia," the executive chairman of Templeton Emerging Markets Group said Friday. "First of all, you have incredible growth. Secondly, you have the rise of the middle-class consumer in places like Indonesia, and the Philippines. This provides incredible opportunities for retailers and people doing shopping malls for developers."
The 10-member Association of Southeast Asian Nations (Asean) is set to average an over 5 percent growth rate this year, he notes, surpassing most regions, barring China.
The region has seen its real gross domestic product (GDP) increase ten-fold over the last five decades, which would make it the world's seventh-largest economy if it were a nation, according to a recent report from Deloitte.
Despite impressive growth, investor sentiment over the 10-member bloc is weak globally as it's perceived as more vulnerable to the U.S. interest rate hikes expected this year.
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"Slower growth, a strengthening U.S. dollar, and an uneven external funding environment should cap absolute returns in the Asean markets this year," warned Morgan Stanley in a note on Thursday.
"Seen against risks of persistently weak external demand, potentially tighter and more volatile financing conditions, and less favorable terms of trade, sustaining the recent growth performance in countries such as Indonesia and Thailand could prove difficult," the bank added.
Growth drivers
But the Templeton chairman believes greater foreign direct investment and manufacturing will allow Asean to sustain its growth levels.
Global foreign direct inflows into Asean's largest countries amounted to $128.4 billion in 2013, according to Bank of America Merrill Lynch, overtaking the amount China received. As energy importers such as India and China rake in huge savings from oil's more than 50 percent tumble over the past six months, the extra cash is likely to head towards Asean, Mobius said. Beijing has already loaned more than $3 billion to Cambodia, Vietnam, Myanmar, Thailand and Laos and more is expected as part of its Silk Road initiative.
Furthermore, companies across Asia are turning to the region as an alternative production hub amid rising labor costs in China, the world's largest manufacturer. Asean countries account for about 5 percent of global manufacturing presently, according to McKinsey.
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"A lot of production in China has moved into Vietnam, Thailand and Indonesia. You're going to see more of that because these countries are becoming more efficient in manufacturing," Mobius said.
"That's the reason why Japan wants to manufacture automobiles in these countries, and now the Japanese are getting to a point where they're not only feeding the local market, they are also exporting from these countries, which will create jobs and lift incomes," he added.
Investment strategy
Mobius recommends investors focus on return on invested capital (ROIC) instead of the more popular return-on-equity (ROE) measure when it comes to companies in Southeast Asia. ROE tend to be volatile, he explained, since it's influenced by debt.
"You have ROEs coming down to 1-2 percent, then going as high as 20-30 percent," he said.
He thinks the best ROIC is in the manufacturing sector, and in companies that specialize in niche areas and have a high exposure to domestic demand. He also likes software companies, especially ones targeted toward cellphones and apps.
"Those are the ones that are going to be winners because the emphasis on hardware is waning," he notes. "I would probably take a stake in Xiaomi if the price was right. The company is a good example, the emphasis there isn't on hardware. It's on the software."