Investors in search of developing-world risk and reward should be looking over to Asia. India and the "tiger cubs" of Southeast Asia are the most-exciting emerging markets on the planet, when screened by six factors by Nomura (NMR) .
As a result, foreign direct investment into those nations will surge from $100 billion a year now to around $240 billion every 12 months by 2025, the investment bank predicts. The companies most likely to take advantage of those trends have dramatic potential growth.
There has been a sustained shift toward Asia in terms of the target and source of capital. Eight out of the 10 most-promising nations for investment are in Asia, out of 23 countries screened by Nomura.
While the United States and Europe have historically accounted for the bulk of investment into the Asian tiger cubs, there has been a sustained shift from West to East in terms of the source of capital. This provides Asia with greater insulation from any global slowdown or setback.
Japan and China are increasingly influential sources of funds for investment, creating a growing intra-Asia bias. Japan has long been the prime source of investment into Asian manufacturing and industry, but it's no longer alone.
Foreign-direct investment out of China, for instance, is rising fast and running at the same share of the overall economy, 1.6%, as the United States. The small fraction masks the massive impact of such cash flowing out of the two largest economies in the world.
Mixing metaphors horribly, these tiger "cubs" are the latest in the "flying geese" phenomenon, first described by the Japanese economist Kaname Akamatsu in 1935. Akamatsu popularized the term when he started writing about the topic in English in the 1960s.
The "flying geese" concept holds that a lead goose pioneers technology and product innovation. Then it outsources production and assembly to geese nations flying behind it, which benefit and even gain ground (airspace?) as a result.
The original lead goose was, of course, Japan. Taiwan, Hong Kong, Singapore and South Korea took off flying behind it, and making Japanese products and parts, in the 1990s in particular. With costs having risen in those countries, Southeast Asia is in the same position now to benefit from investment by companies in all the more-developed Asian nations, as is India.
In India, the investment is likely to flow into sectors that require growth capital to advance. That means industries such as retail, auto production, infrastructure, hospitals and drug manufacturing.
A freer flow of capital is likely to be negative for listed e-commerce companies, which will face higher competition in industries that require comparatively little investment to enter.
In Southeast Asia, industries such as finance, logistics, transportation, consumer products, infrastructure and construction stand to gain from greater investment. But low commodity prices, entrenched monopolies and already-high penetration of mobile phones suggest the telecom, utility and oil-and-gas industries, while capital intensive, are less exciting.
The Nomura screens throw up six stocks with an upside of 25% or greater on their current price. But they also reveal four stocks that look set to slide backwards.
Motherson Sumi (MOZTY) , the Indian maker of wire and plastic car parts, is the stock with greatest upside, of 57% on its current value. The company offers a play on the build-up of automobile manufacturing in India, its business benefitting as an ancillary supplier as multinationals set up Indian production. Its lightweight tech- and camera-based mirror systems are particularly popular.
Pembangunan Perumahan JK:PTPP, a major infrastructure and real-estate developer in Indonesia, is a direct beneficiary of rising direct investment that spurs the need for infrastructure. That backs the businesses it builds: operations in sea ports, power plants and airports. It has a 53% upside, Nomura figures.
Nissan Motor (NSANY) is a familiar name, but with a surprising 49% upside. Its alliance with Mitsubishi Motors should help its aggressive expansion in Southeast Asia, where it has already upped production in Indonesia and Thailand in particular. And it is becoming a major multinational vehicle producer in India, using it as an export hub.
Singapore Post (SPSTY) sounds like a boring national postal service, but will see business soar as the Lion City becomes an increasingly influential e-commerce and logistics hub. This should help it get more efficient as it scales up business, offering it a 34% upside. SingPost has also invested in logistics in Malaysia and e-commerce in the United States. Not for nothing has e-commerce giant Alibaba (BABA) built up a 14% stake in the company.
Ajinomoto (AJINY) , best-known for producing monosodium glutamate, is hardly my favorite company in terms of product. But it makes a long roster of other spices and seasonings, too. The dramatic growth in the consumption of processed foods in developing Asia presents it with rapidly expanding markets. It is building out its distribution networks and developing new (I hope healthy) products.
FIH Mobile (FXCNY) , which designs and makes phone handsets, is on the path of aggressive expansion to match the region's prospects. It has two new handset factories in India to boost production. The company also has a $200 million investment in Snapdeal -- although it remains to be seen what an advantage that results in being.
Snapdeal this week pulled out of talks to sell itself to larger e-commerce rival Flipkart. That marks a setback not just for FIH Mobile but also Softbank, one of the most-experienced venture-capital investors in Asia, which had been pushing for an all-stock sale.
Investment in India is not for the faint-hearted. Corporate infighting is common, and holdings such as real estate are often subdivided among members of an extended family who cannot agree on price or terms of sale.
The Snapdeal sale reportedly fell apart because the company's management balked at non-compete agreements for its founders, as well as the requirement that all of Snapdeal's shareholders agree to the sale. Snapdeal instead has chosen to go it alone by selling off its e-wallet business FreeCharge and its logistics arm Vulcan.
Vani Kola, the managing director of the venture fund Kalaari Capital, an early investor in Snapdeal, believes that the scrapped sale shows total disregard for the interests of Snapdeal's investors and employees by management.
"I believe that these actions harm the credibility of our nascent startup ecosystem in India," Kola said, Reuters reports.
It's no surprise, then, that the growth in India and Southeast Asia is not all good news. Several companies should suffer as developing Asia grows, in Nomura's eyes.
Haitian International HK:1882, which makes injection-molding machines for plastics, has a 12% downside, Nomura calculates. It has been trying to avoid tariffs charged by the Indian government on finished products shipped from China, by building assembly factories in India. But it's a risky strategy.
Makemytrip (MMYT) , the Indian online-travel company, also has a 12% downside risk. Foreign investment will heighten competition in online-travel services, an industry with a relatively low barrier to entry.
IndoMobil JK:IMAS, which assembles and distributes vehicles from Audi to Volvo in Indonesia, faces growing competition from potential new as well as expanding rivals. Japanese carmakers, the longtime partners of IndoMobil and Astra International, control 90% of the Indonesian market. IndoMobil is particularly at risk, Nomura's analyst Elvira Tjandrawinata says, because it has weak positioning and a poor product lineup. That gives it a 10% downside.
Astra International (PTAIY) , which also makes and sells vehicles in Indonesia, likewise contends with rising competition from possible new entrants into its industry, particularly the growing 4WD market. It also depends on Japanese partners. For now, Astra has all the advantages of being the dominant player -- but that position may not hold for long. Nomura calculates it has a 2% downside.
There could be an extra trade wind behind the flying geese in the form of emerging-market currencies.
The Indian rupee, with a 13% potential gain through the end of 2019, is particularly attractive. Likewise, the Indonesian rupiah looks set to post a 12% increase, all the gains set against the U.S. dollar.
The Philippines peso, with a 10% upside, the Malaysian ringgit, set to gain 7%, and the Thai baht, looking at a 6% advance, all look attractive, too. The Singapore dollar, given the country's openness, would be the currency to avoid.
The main risks to growth in India and Southeast Asia are external, a slowdown in global growth chief among them. Rising protectionism in the West is also a threat. So, too, is the rapid buildup of debt in China, which if coupled with a sudden Chinese slowdown could stall outward bound investment.
But these, the world's most-attractive emerging markets, are increasingly generating their growth internally, from greater domestic economies and higher consumer spending power. Leaders in China and Japan, arguably unlike the West, still have faith that a globalized world, both in terms of market and production base, is where the future lies.
