Feb 13, 2015, 2:12 PM ETPanel

Asia Under New Management: Gambling on Regime Change

High investor optimism risks creating inevitable disappointment if new leaders fail to meet elevated expectations, as seen historically with the Obama administration and potentially facing Indonesia's President Joko Widodo.
The primary areas where President Jokowi is expected to drive meaningful change are addressing infrastructure bottlenecks and reducing corruption, which remain critical for Indonesia's stability.
While President Jokowi inherited a divided parliament and a complex political landscape, his prior success in governing Jakarta suggests he possesses the requisite political skills to navigate national challenges.
In India, Prime Minister Modi faces significant hurdles in securing state-level support, which controls three-quarters of project implementation, raising questions about his ability to outperform predecessors.
Investor sentiment is increasingly tied to the "quality and tenure of leadership" and a leader's ability to build alliances, rather than just the stability of the country alone.
There is a growing concern that new leaders may be adopting nationalist policies (such as Jokowi's) that could conflict with the need for streamlined, borderless economic integration.

Panelists explicitly reject the notion of a monolithic "Asia," emphasizing that the region comprises vastly different economies, cultures, and challenges, ranging from Singapore's first-world status to India's massive, impoverished states.
Economic narratives often fail to account for the complexity of specific sub-regions; for example, Uttar Pradesh in India has a population comparable to Indonesia, requiring distinct analytical approaches rather than broad regional generalizations.
Linguistic and cultural barriers further complicate the "one Asia" narrative, with no shared linguistic root linking languages like Hindi, Mandarin, Malay, and Thai.
Investment strategies must move beyond country-level analysis to examine specific states, cities, or business partnerships to accurately assess opportunity.

China is perceived as increasingly assertive in the South China Sea, prompting a regional "pushback" from Japan, Vietnam, the Philippines, and even quieter opposition from Malaysia.
The geopolitical risk landscape is heightened by the lack of institutional frameworks (similar to Cold War-era European mechanisms) to mitigate accidental clashes between major powers.
India's strategic pivot toward Japan, driven by mutual infrastructure financing needs and Japan's 70% GDP debt constraint, has strengthened India's negotiating position vis-à-vis China.
While China is a geopolitical "behemoth," panelists argue it is not "first among equals" and must negotiate with other powers like India and Japan to maintain regional stability.
There is a consensus that while Asia has sufficient internal savings to fund its own infrastructure, it currently relies heavily on external demand from Western markets, which are facing demographic decline.

The return of sectarianism is identified as the single biggest risk in Southeast Asia, with specific concerns regarding Buddhist-Muslim unrest in Myanmar and anti-Muslim sentiments in India's political landscape.
Worsening income inequality poses a "time bomb" across the region, even in developed economies like Singapore, where a 10-fold income gap exists between the top and bottom 20% of households.
Demographic dividends in India and Indonesia are contingent on the creation of high-quality jobs; failure to provide employment could exacerbate poverty and social unrest.
Vested interests are increasingly capturing legislative and regulatory power in countries like Singapore and Indonesia, distorting business environments and stifling creative destruction.
Bureaucratic inertia and onerous regulatory environments are significant barriers to rapid change, with panelists noting that dismantling these systems is a multi-decade process rather than a short-term fix.
Investors are cautioned against the media-created "100-day" expectation, as structural reforms in large economies like India and Indonesia require long-term horizons.

Southeast Asia is highlighted as a high-return region, consistently outperforming other global regions in Return on Capital Employed (ROCE) over the last 25 years, with Malaysia and Indonesia showing particularly strong performance.
The ASEAN Economic Community (AEC) represents a long-term step forward for integration, though practical trade barriers remain, necessitating reliance on "ground-up" sub-regional initiatives like Iskandar (Malaysia-Singapore) and the Greater Mekong Sub-region.
Emerging markets beyond the core giants offer significant potential, with specific mentions of opportunities in Bangladesh, Pakistan, and potentially Afghanistan, despite high risks.
Infrastructure financing is shifting from reliance on Western institutions to Asian savings, facilitated by mechanisms like the BRICS Bank and domestic capital markets.
Corporate governance remains a critical risk and opportunity factor; the rise of state-owned enterprises and lack of transparency (e.g., in the Alibaba listing) may constrain private sector innovation.
Specific sectors showing promise include health and wellness products driven by rising pollution and allergy rates, as well as innovative private enterprises like AirAsia that exemplify regional entrepreneurial success.

Panelists recommend a long-term macro view based on "mean reversion," arguing that the world is returning to a 15th-century economic order where Asia once again dominated global trade.
China remains a critical market with strong long-term growth potential, though near-term "bumps" and complacency among investors regarding its political and economic stability are noted risks.
Diversification is advised, with panelists urging investors not to count out the United States, citing its historical resilience and ability to reinvent its economy regardless of leadership changes.
Malaysia is pitched as a strategic hub for regional investment due to its multicultural nature, lower costs compared to Singapore, and success stories like AirAsia and CIMB.
The "Little BRICS" (Bureaucracy, Regulation, Interventionism, and Corruption) is identified as a more relevant framework for assessing risk than traditional geopolitical blocs.
Successful investment requires identifying local case studies of success (e.g., Tony Fernandez, Equator Pure Nature) to validate market potential before committing capital.