During a meeting last week, I was asked, “If you could invest your own money in any one asset over the next three to five years, what would it be?” I will share the answer I gave and the one I wished I could give. Anyway, there were five of us in total at the meeting, including the person who asked the question. What was interesting — and this is a disclaimer to say none of this should be taken as investment advice; whatever I say here is just an opinion — is that every single person basically said, “Bet on the US dollar”, in whatever form.
The asker’s answer was Treasury Inflation-Protected Securities (TIPS) which are US government bonds designed to protect bondholders from inflation. This makes sense — with Donald Trump in power and his policies looking inflationary, potentially necessitating further interest rate hikes which then strengthen the dollar (despite whatever Trump might ask the Federal Reserve to do), an inflation-protected “bet on the US dollar” is a good bet.
My answer was a bit tongue-in-cheek but I meant it fairly seriously. Since 2014, the S&P 500 index has gained a pretty remarkable 223% or so with the past few years, in particular, being driven by the so-called Magnificent Seven of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. But something has beaten all of that with an amazing 795% increase over the same time period. And no, it’s not Bitcoin or some cryptocurrency. It’s actually the trades that Nancy Pelosi, the former Speaker of the House of Representatives, has made over that period.
What first began as an internet meme became a market reality when WallStreetBets and Digital Markets teamed up to launch the Unusual Whales Democratic ETF or “NANC”, named after Pelosi. The NANC essentially tracks and invests in stocks bought and sold by Democratic members of Congress and their spouses. Retail investors can actually buy the NANC. According to the investing website Motley Fool, one of the reasons why individuals may consider the NANC is if “… you believe members of Congress have access to privileged information that can help them beat the market”.
This leads me to a broader point. It’s no secret that politics and economics are intertwined, and it doesn’t take a lot of cynicism to wonder if extremely influential and powerful politicians may have access to information that the market may not. Even for the less cynical among us, it’s clear that we operate within a political economy, not just an economy. The track record — at least in the US by Congress and by the Federal Reserve — since the Global Financial Crisis has consistently prioritised the financial economy over the real economy.
Having been in the investing world for several years, it does make me uneasy that one of the first questions we ask whenever some event happens is — what is the impact on the “markets”? And we then look to governments or regulators to then make changes accordingly to ensure the stability of “markets”. And I’ve seen, even during the pandemic, where equity and macro analysts from banks have prioritised “what markets and rating agencies will think” over “what people will need” in a crisis.
But this is still “secondary” of sorts to an even bigger question of the decoupling of the financial economy and real economy. To what extent do financial markets around the world match the performance of the real economy — let’s take GDP as the measure for now — of their respective domiciled countries? And if the political powers that be continue to seek wealth generation via the “markets” considerably more than via the “economy”, we can expect regulators and politicians to keep pushing for markets to remain stable, healthy and growing. Hence, I thought the NANC made a lot of sense as was my answer to the asker.
Which brings me to the answer, or at least one of the answers, I wished I could have given. It would have been great if I could have told the asker, “I’d probably take a bet on Southeast Asia” but unfortunately, I don’t think that that is a good bet. At least for now.
There’s no denying the very favourable macroeconomic conditions of Southeast Asia and the growth trajectories of many of these countries. But just because Southeast Asia is a great macroeconomic story doesn’t mean it’s a great investment story. A recent report by the venture capital firm Lightspeed illustrates the idea well. While we believe that there is a growing middle class of sorts in Southeast Asia because of favourable demographics, Lightspeed argues that the market to “win” for consumer-focused ventures in Southeast Asia isn’t Indonesia — as most people might think — but actually Singapore.
This is because the demographics of Indonesia mean that many consumers are still very much cost-focused; they will seek discounts on purchases as their purchasing power isn’t strong enough yet to consistently make discretionary purchases. Thus, for consumer-facing companies, they will have to burn tonnes of cash for customer acquisition to maintain those discounts and gain market share. But it remains unclear whether they can then raise prices to become profitable once they obtain that market share, given consumer price sensitivity. There are only two markets where discretionary spending is strong — Singapore and, to a lesser extent, Kuala Lumpur.
Thus, when we think of investing in Southeast Asia, we really have to consider the nuances of those investments. Another major issue — less relevant to retail investors because of a lack of access — is the issue of exits for private capital. Exits via the public markets in Southeast Asia remain a massive issue for private equity investors, which, in no small part, is due to the relatively low daily-traded volumes of these markets. An important reason for those low volumes is that most of Southeast Asia’s listed companies are either state-owned enterprises or family-owned companies that typically hold sizeable blocs that are non-traded.
Relatively weak public markets reduce exit strategies for private investors which then feeds all the way down to venture capital funds and the startups in which they seek to invest. Part of a vibrant venture capital market requires healthy exit markets, which then requires healthy public listed markets. And so, while Southeast Asia remains a terrific macro and growth story, it’s less clear that it is a wonderful investment story as a whole.
Don’t get me wrong — there are ways to generate good returns in Southeast Asia, but they are very much dependent on exits. And I suspect that the types of capital owners who have made the most money in Southeast Asia over the past decades or so have been families. In Malaysia’s case, where growth in wages has stagnated and the market itself has been relatively flat, where has the macro growth accrued to? It’s not to labour at large or capital at large — my suspicion is that much of the wealth has accrued to family businesses that have been around for decades.
Back to the original question. For “investing in Southeast Asia” to be a good answer, the countries that can address the political economy of business in Southeast Asia — historically a family affair — and can therefore hasten the transition from family ownership to professional ownership will be best placed to capitalise (pun intended) on the investment story of Southeast Asia.