Private equity return to Southeast Asia could boost stock prices

Bain & Company is out with a positive outlook on private-equity in Southeast Asia for 2013. The firm expects deal-making to pick up next year on strong economic fundamentals and a reversal of the drop in interest seen since the peak in 2007.

An increase in foreign investment would be a welcome sign for investors as China and India become less able to support asset prices in the region. Bain & Company isn’t the only firm eyeing the group, in October, KKR & Company (KKR, quote) opened an office in Singapore and plans to expand lending to companies in the region.

I warned investors on global economic risks to Vietnam’s export economy in our year ahead piece in January.  Shares of the Market Vectors Vietnam (VNM, quote) have underperformed the broader emerging markets index since January with a gain of 5.8% year-to-date but may be ready for a rebound on increased funding activity in the country.

I was more positive on Malaysia for its responsible monetary environment and slowing inflation. The iShares MSCI Malaysia (EWM, quote), a broad-based representation of the performance of companies in the market, has increased 9% since the beginning of the year but still trades for a relatively attractive 15 times trailing earnings of holdings. The fund holds 44 stocks concentrated in financial services (29.5%), industrials (20.8%), consumer goods (20.6%), and telecommunications (9.5%).

The Indonesian market was particularly attractive last December after Fitch Ratings became the first credit agency to upgrade the country’s bonds to investment grade.  The country’s economy has been insulated this year by the fact that consumer spending makes up about two-thirds of GDP, a break from the export-led economies of the region.

The Market Vectors Indonesia (IDX, quote) invests in companies domiciled in Indonesia or that accrue at least 50% of their revenue from the country. The fund’s two largest sector holdings are in financial services (26.3%) and basic materials (22.8%). Shares have been flat since January but pay a 1.5% dividend yield.

Given the relatively high growth rate of the region as a whole and the volatility in individual markets, investors may want to look at the Global X ASEAN 40 (ASEA, quote) as a diversified bet on the group. The fund targets investments across five Southeast Asian markets and has outperformed the broader emerging markets index this year with a return of 11.7% since January. The fund charges an annual expense ratio of 0.65% and pays a 2.2% dividend yield.