Stock prices of companies listed on Southeast Asia's exchanges have surged so far this year, fuelling gains of 45 per cent, 37 per cent, 35 per cent and 18 per cent in the main Indonesian, Thai, Philippine, and Malaysian indices.
But these rises have not made owning an Asean-focused investment fund commensurately rewarding since the larger number of companies listed on Singapore and Malaysia's stock exchanges means that these markets feature strongly in benchmark indices.
JP Morgan Asset Management's JF Asean fund was 39.3 per cent invested in Singapore at the end of October, for example, with only 17.7 per cent and 0.9 per cent allocated to companies listed in Indonesia and the Philippines respectively.
Since the Straits Times Index has risen by only 11 per cent this year, the performance of regionally focused funds such as the JF Asean fund has lagged that of country-focused funds.
So far this year, the JF Asean fund has risen by 33 per cent in US dollar terms compared with 65 per cent rises in the JF Philippine and JF Thailand funds and a 54 per cent gain in the JF Indonesia fund.
The benefits offered by a regionally focused fund may become clearer as the year draws towards an end. Consumer-focused stocks have been an important driver of rises in the smaller Asean markets this year. These stocks are, however, now relatively expensive.
As the recovery continues, cyclical sectors such as shipping and petrochemicals should also see earnings rebounds, boosting stock markets on which companies focused on these sectors are listed, such as Singapore and Thailand. Singapore's exchange is home to a large number of companies with exposure to the region beyond Asean, which should also witness earnings momentum next year.
Asean-listed companies have been boosted by stronger than expected GDP growth at home and low interest rates. Asean's more mature markets - including Singapore, Malaysia and Thailand - have been quicker to tighten monetary policy this year, dampening potential for further rapid stock price rises but also limiting risk of a big correction.
At the same time, as stock prices have risen, concern over the authorities' reaction to continuing capital inflows has risen. This month, stock markets across the region corrected, with Thailand witnessing capital outflows in particular as foreign investors took profits amid reports that the Bank of Thailand is considering a tax on capital inflows.
Despite the negligible economic impact of riots in Bangkok this year, political tensions may resurface ahead of polls next year. Indonesia has also suffered from unrest, with the second year of President Dr Susilo Bambang Yudhoyono's second five-year term promising to disappoint. In contrast, the Philippines benefited from a boost in business confidence following a smooth transition after presidential elections.
This year it has been Vietnam which suffered most from weak investor confidence as authorities struggled to stabilise the currency's value. Asean funds generally do not include investments in Vietnamese stocks, which are excluded from popular benchmarks.
The country is alone among Southeast Asia's larger economies in suffering from a current account deficit. More US dollars flow out of the country to pay for imports than flow into the country, resulting in a higher price for US dollars on the black market than reflected in the official exchange rate. In September, the IMF said the country's macroeconomic stability does not appear robust as a series of devaluations in the official dong-dollar exchange rate have followed the black market rate downwards since November 2009, compounding the effects of a 13 per cent decline in Vietnam's main index for overseas investors.
A return of investor confidence may be some way off: Vietnam's trade surpluses with the US, Japan and EU are offset by its trade deficit with China. Nevertheless, the country's economy continues to grow strongly, underpinned by investment spending and confident consumers. Indeed, among Southeast Asia's larger economies, only Indonesia and Vietnam are expected to grow more rapidly in 2011 than 2010 according to the Asian Development Bank's forecasts.
Ever since BRIC (Brazil, Russia, India and China) was coined in 2001, there has been a search for another catchy acronym to define new emerging markets: from 'the Next Eleven' to 'VISTA' and 'CIVETS'.
Surprisingly, the only countries to appear in all three of these groupings are Indonesia, Turkey and Vietnam. The Philippines appears in 'the Next Eleven' along with Bangladesh, Egypt, Iran, Mexico, Nigeria, Pakistan and South Korea. Egypt is also included among the 'CIVETS' (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa). 'VISTA' stands for Vietnam, Indonesia, South Africa, Turkey and Argentina.
Such groupings highlight the long-term potential of these markets. The divergent performance of Indonesia and Vietnam's stock markets this year illustrates the risk of investing in a country-focused fund rather than a regional fund. At the same time, a regional Asean fund is not an effective way to gain exposure to these markets due to the minor representation of emerging Asean markets such as the Philippines and Indonesia in such funds.
Indonesia accounts for 42 per cent of the region's population and 37 per cent of its GDP but has fewer companies listed on its exchange than Singapore, Malaysia or Thailand, resulting in a relatively low representation in benchmark indices.
Consequently, as foreign funds flood into Indonesia and the Philippines, investment is concentrated in relatively few companies. One good play on this would be to invest in an Asean fund - such as those offered by Aberdeen Asset Management, Fidelity Investments or JPMorgan Asset Management - and reinvest profits in selected stocks listed on exchanges in Indonesia, the Philippines and/or Vietnam as long-term investments.
Car distributor Astra International and clove cigarette maker Gudang Garam both feature among the leading holdings of highly rated Indonesia-focused funds of BNP Paribas, Fidelity, JPMorgan Asset Management and Schroders, for example.