“I wish to see the United States the dominant power on the shores of the Pacific Ocean.”
-Theodore Roosevelt, 1900
In July 1905, America sent an impressive delegation of officials on a cruise through Asia. The purpose of this expedition was to make an emphatic statement that America intended to be a significant Pacific power.
James Bradley’s The Imperial Cruise is a fascinating, yet skeptical view of this junket and America’s strategy in Asia. His main point is that the American backing of Japan as its lead ally in Asia is what led to a century of conflict.
The major rising power in Asia now is clearly China.
China’s rising defense spending and more aggressive actions, especially in the South China Sea, are important developments worthy of close study and debate. But today I want to outline China’s economics and strategy in Asia, and explain why it’s important for you as an investor.
China Weaves Its Web
In Asia, economics is security.
China realizes this, and is leveraging its recently gained economic heft to execute a plethora of bilateral and regional trade, and investment deals in Southeast and South Asia. The goal is to boost China’s growth and security by tying together Asia in a web of relationships, with China at the center.
The country is determined to be Asia’s core consumer market and primary source of capital for both private companies and governments.
It’s also attempting to link all these markets together through funding and building infrastructure throughout the region. Some examples of this are its Silk Road initiative and the recently launched Asian Infrastructure Investment Bank.
As some American presidential candidates and voters continue to slam trade agreements, the Asia-Pacific region is undergoing dramatic economic and political change. Asian countries are going from being exporters to consumers, from borrowers to investors, and from being dependent on Western markets, to trading and investing more amongst themselves.
All of these trends require that America better understand, adapt, engage, and compete with this new Asia.
And investors need the right strategy to capture the growth while managing the risk effectively.
Welcome to the Cockpit of the Pacific Century
China’s efforts are focused on two groupings. The first consists of the 10 countries in Southeast Asia that make up The Association of Southeast Asian Nations (ASEAN). This group includes countries such as Singapore, Malaysia, Indonesia, Thailand, and the Philippines.
It might surprise you to learn that this group comprises a population of 625 million consumers and a total gross domestic product (GDP) of over $2.5 trillion.
ASEAN is also America’s fourth-largest trading partner. And over the last couple of years, foreign investment in ASEAN countries has been larger than investment in China.
The second grouping is what the investment community calls Frontier Asia. This group begins with Vietnam and extends to countries such as Laos, Cambodia, Burma, Mongolia, and Sri Lanka.
As China’s wages have increased sharply, foreign investment in these countries has soared.
In 2010, China signed a free-trade agreement with ASEAN allowing 90% of goods to trade at zero tariffs, and trade doubled within a year. Trade between China and ASEAN is now at $445 billion per year, and China’s Premier Li projects this will grow to $1 trillion by 2020.
America and Japan aren’t just standing idle – they’re also trying to expand economic ties with countries in this region.
America has taken the lead in negotiating the Trans-Pacific Partnership (TPP) countries together in a trade and investment grouping. Unfortunately, right when it’s up for approval, it’s facing opposition based on short-term politics rather than America’s long-term interests.
Meanwhile, the Japanese government and companies from the country have long been very active in Southeast and Frontier Asia. One example of this is Japan’s recent $1.7 billion aid package to Vietnam – which is one of the fastest-growing countries in the world with a burgeoning 100 million-plus population.
A wave of capital is washing over Vietnam. Foreign investment projects announced in March 2016 include:
- A Samsung (KS:005930) research and development center – $300 million
- The ZincOx Resources steel plant – $115 million
- Nestle's (SIX:NESN) sixth factory – $70 million ($520 million total)
- An LG Display Co Ltd (NYSE:LPL) manufacturing base – $1.5 billion
So how can you get a piece of this action? The easiest way is through exchange-traded funds (ETFs) for Vietnam and Southeast Asia, via the Market Vectors Vietnam (NYSE:VNM) and the Global X Southeast Asia (NYSE:ASEA), respectively. ASEA is up 14% so far in 2016.
And for a more active approach, I suggest the Asia Frontier Capital (AFC) Vietnam Fund and the Frontier Asia Fund. Both funds are ranked No. 1 in terms of performance over the past three years.
Good investing,