As the US and European Union economies struggle through the hangover of a deep financial crisis, countries in Asia that suffered their own crisis a dozen years ago are posting some of the fastest growth rates in the world.
South Korea, Thailand, Indonesia, Malaysia and others in Southeast and East Asia are benefiting from an export-driven regional boom, which, to varying degrees, is also lifting their stock markets.
“They've learned a lesson from the crisis,” says Simona Mocuta, who follows Asia-Pacific economies for IHS Global Insight, referring to the regional economic meltdown of 1997-1998. “The fundamentals were solid when the exports came back," following the global recession of 2008-2009.
In the first half of 2010, Indonesia’s economy grew almost 6 percent, and South Korea’s 7.6 percent. Singapore—which is considered a developed economy—managed GDP growth of 17.9 percent, led by a 40-percent jump in exports.
Second-quarter GDP figures are due out for Malaysia and Thailand in the coming week, but in the first quarter of this year, the former grew by 10 percent and the latter 12 percent.
Though exports, especially to China, are a key driver, experts also cite other factors in the boom, including flexible exchange rates, strong foreign direct investment, large foreign exchange reserves, and the rising incomes and domestic demand associated with the maturation of emerging economies.
“Most of these government are more proactive than western countries,” says Mansoor Dailami, manager of international finance at the World Bank. “It’s fiscal prudence.”
Then, of course, there is the China factor, and the gravitational pull of what is now the world’s second-largest economy, which itself is expected to grow 8-9 percent this year.
“The region has become more dependent on what happens in China than the U.S.," says Alec Young of Standard & Poor’s.
For that reason alone, experts are predicting a slight slowdown in second-half growth, as China puts the brakes on its own economy.
Nevertheless, though China absorbs everything from commodities to finished products—palm oil from Indonesia and Malaysia, for example, and electronics from Thailand and South Korea—there is still plenty of trade within the region’s smaller economies.
“Incomes are growing and you have an increasingly attractive demand market within Asia itself," says Mocuta. “You want to see less savings and more consumption.”
For the more populous countries, of course, domestic spending is a clear driver.
In Indonesia, for example, car sales are growing 70 percent, notes Mocuta.
And though the countries have much in common, each have their own strengths. Malaysia has become a capital of Islamic finance. Thailand is a major tourist destination and auto industry player. Singapore has become a hi-tech and pharmaceutical capital. Korea is known for its shipping industry.
Such dynamism has some experts predicting big things for the region's smaller players.
“Initially it was China and the strong linkage,” says Dailami. “My sense is that they are going to establish their own independence.”
Given such potential, as well as the current boom, investors are paying more attention to these emerging markets.
Indonesia's stock market was up 15.2 percent in dollar terms, as of mid August. Thailand's was up 16.8 percent, Malaysia's 12.5 percent and The Philippines' 11.0 percent.
“It’s starting to get more on the radar. Everyone is looking for more growth,” says Patricia Oey, an EFT analyst at Morningstar. “You see fund flows going to emerging markets.”
And leaving US equity funds—especially after the market's dismal performance in the past decade.
According to a 2010 Vanguard study, emerging markets outperformed US stocks since the end of the last great bull market. Over five years, the MSCI Emerging Markets Index managed an average annual total return of 14.9 percent, versus 0.7 percent for the MSCI USA Index. On a ten-year basis, the returns are a gain of 10.2 percent, versus a loss of 1.2 percent.
As impressive as that may be, the study is also quick to warn that there is virtually no correlation between GDP performance and stock market performance in emerging markets.
Investors eyeing the Asia-Pacific region, as well as the countries mentioned in this story, have a wealth of options, from ADRs to mutual funds to ETFs.
After Japan and China, South Korea probably has the most ADRS, from Posco to LG Display to SK Telecom .
Powershares BLDRS Asia 50 is a ETF based on the BNY Mellon Asia 50 ADR Index, which covers overseas firms that trade on U.S. markets and are a direct play.
It is dominated by Japanese and Australian companies, but does include some big players from Taiwan, Hong Kong and South Korea.
Emerging-market investment vehicles for the region do not include Japan.
There are 56 U.S. open-end mutual funds categorized as Pacific/Asia ex-Japan, according to Morningstar. Year to date through August 16, the group is basically flat, with a return of 0.47 percent. There are Some 41 US ETFs in the same category. As a group they are down 2.41 percent through August 13.
Virtually all of them, however, include a significant amount of Chinese companies, and thus reflect the flat performance of the Chinese market in 2010.
More broadly, however, the MSCI Asia-Pacific Index is up 6.99 percent.
“With the exception of South Korea, most of the funds don’t have much exposure" to Indonesia, Thailand, Malaysia, Thailand and Singapore, says Morningstar mutual-fund analyst Bill Rocco, who otherwise warns that retail investors should generally avoid regional emerging market funds and take a more balanced approach through global ones.
Investors looking to defy conventional wisdom and zero in on the region might want to take a look at San Francisco-based Matthews Asia, which is the largest dedicated Asia-only investment firm. It has 11 mutual funds, including one dedicated to South Korea.
Its Pacific Tiger Fund , which had $4.5 billion in assets as of July 31, had 14.3 percent of its money in South Korea, 7.6 percent in Indonesia, 4.5 percent in Malaysia, 4.1 percent in Thailand and 3.4 percent in Singapore. The fund is up 7.07 percent as of Aug. 16.
Its Asia Small Companies Fund has 10.8 percent in Singapore and low single-digit investments in Malaysia, Thailand and Indonesia. The fund is up 14.38 percent year to date.
For those interested in individual countries, there are two ETFs each for Indonesia and South Korea, and one each for Thailand, Malaysia and Singapore.
The iShares MSCI Thailand Invest Mkt Index is up 11.75 percent in the first half. It's holdings are about 31 percent energy and 36 percent financials. Only a year
Van Eck Global's Market Vectors Indonesia Index ETF is up 17.42 percent so far this year. About 25 percent of its holdings are is in financials and and another 25 percent in materials,
The IShares MSCI Indonesia Invisible Market Index Fund is up 14.21 percent. Financials account for 28 percent of its assets, with consumer discretionary and consumer staples coming in at about 13 percent each.
iShares MSCI South Korea Index is up 2.85 percent through July. a It's portfolio is perhaps the most balanced, with the bulk in the financial, IT. industrial, materials and consumer discretionary sectors
The IQ South Korea Small Cap has a three-month return of -2.13 percent since its mid April launch.
iShares MSCI Singapore Index is up 6.59 percent through the end of July. It is almost half financials.
The Singapore fund is also an indirect yet effective way to invest in the emerging economies of Southeast Asia.
"It's a good way to play exposure in that general region," says Oey of Morningstar. "A lot of financial and real estate firms are invested throughout the region, including China.”