Aberdeen, Samsung Bet on Small-Cap Stocks: Southeast Asia

Southeast Asia’s small-cap stocks are drawing investors including Aberdeen Asset Management Plc and Samsung Asset Management Co. as the region’s economies accelerated even as growth in China and India slowed.

Small caps are benefitting from domestic demand and their earnings are insulated from global macroeconomic forces, said Alan Richardson, who helps oversee about $82 billion for Samsung Asset Management, including companies with values as low as $200 million. The Asian Development Bank this month raised its 2012 growth forecast for Southeast Asia, the only economic area covered by the lender to get a boost.

The MSCI Southeast Asia Small Cap Index climbed 25 percent this year, surpassing the MSCI Southeast Asia Index’s 18 percent advance and the 12 percent gain of the MSCI Asia Pacific Index. A similar gauge in Singapore posted its longest winning streak ever, rising for 22 days.

“Investors are finding value in the small caps following a sustained rally in the big caps,” Ng Soo Nam, Singapore-based chief investment officer at Nikko Asset Management, which oversees about $165 billion, said in an interview on Dec. 14. “If the global environment stabilizes, we’re on the verge of a pretty strong market performance next year.”

Nikko Asset defines small-cap stocks as companies with market values lower than $2 billion.

Southeast Asian countries including Laos, the Philippines and Thailand are among the 12 best-performing stock markets globally, according to data compiled by Bloomberg, posting the biggest gains in Asia this year after Pakistan.

Higher Valuations

The gains in stocks have pushed valuations in Southeast Asia to the highest in 16 months. The regional stock index trades at 14.8 times estimated earnings, one of the highest levels since August 2011, while the Southeast small-cap index trades at 15.9. Those exceed the multiples for Asia-Pacific markets including Australia, China, Hong Kong and South Korea, according to data compiled by Bloomberg.

Northeast Asia stocks are expected to post bigger gains in 2013 than equities in Southeast Asia, which have become expensive in the near term, Michael Kurtz, Nomura Holdings Inc.’s global head of equity strategy, told reporters in Hong Kong on Dec. 11.

Southeast Asia is also growing more reliant on trade with China, a market that posted its slowest growth in three years, according to the Organization for Economic Cooperation and Development last month.

Still, the region’s growth will remain resilient over the next five years as stronger investment and private consumption reduce dependence on exports for expansion, the OECD said.

Economic Policies

The region’s economy is expected to expand 5.3 percent, according to Manila-based ADB, up from an earlier forecast of 5.2 percent. Policy makers have loosened fiscal or monetary policies this year to spur growth, with Philippine President Benigno Aquino increasing spending to a record and Malaysian Prime Minister Najib Razak boosting outlays.

“Small caps tend to be domestic-focused consumer businesses,” said Richardson at Samsung Asset. “They’re benefitting from monetary and fiscal stimulus of the governments in Southeast Asia. That helps offset the external slowdown, which is driving slower export growth.”

To capture the region’s rising consumption, Samsung Asset holds shares of companies such as Siam Global House Plc, a Thai retailer of furniture and building materials, to PT Ramayana Lestari Sentosa, an Indonesian department store operator, Richardson said.

Retailers, Banks

Retailers and financial services companies including Siam Makro PCL, the owner of Makro discount-store chain in Thailand, and Bank OCBC NISP, the Indonesian banking unit of Singapore-based Oversea-Chinese Banking Corp., are among the top holdings of Aberdeen Asian Smaller Companies Investment Trust, according to data compiled by Bloomberg. Aberdeen defines small caps as companies with a market value that’s lower than $750 million.

Aberdeen is attracted to companies with “good solid balance sheets, businesses benefitting from increased consumer wealth and spending,” Hugh Young, who helps manage about $70 billion in Asian equities at Aberdeen Asset Management Asia Ltd. in Singapore, said in an e-mailed response to queries, adding that the stocks were “cheap” when it bought them.

Companies from Malaysia, Thailand and Singapore accounted for about 45 percent of Aberdeen Asian Smaller Companies Investment Trust’s holdings as of July 31, according to data compiled by Bloomberg.

Growing Wealth

The region’s wealth is also increasing as more millionaires emerge, a report released by RBC Wealth Management and Capgemini SA in September showed. The number of people in Asia-Pacific with at least $1 million in investable assets jumped 1.6 percent last year to 3.37 million, helped by gains in China, Japan, Thailand, Malaysia and Indonesia.

“We’re seeing a boom in consumerism because of the rise of per capita incomes in Southeast Asia,” said Mark Mobius, who oversees more than $40 billion as chairman of Templeton Emerging Markets, adding that “reforms and the breaking down of trade barriers open opportunities for companies to become more regional in scope.”

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