The south-east Asian ‘tiger' economies Singapore, Malaysia, Thailand and Indonesia used to be regarded as some of the world's most dynamic investment opportunities. Now, according to some experts, their power is being eroded by the ‘dragon' economy of China.

Two factors loom large in this assessment. One is possibly weakening demand from the US. The second is that, cheap manufacturers though the tiger economies are, China is cheaper.

This applies particularly to Indonesia, the best performing market in the region in 2004. Indonesia has substantial clout in the region because of its large population and oil reserves. But it also has high unemployment and needs to grow faster to reduce this and circumvent ethnic tensions. According to Mark Williams, manager of F&C's Pacific Growth Fund, “the question is whether it can find a distinctive long-term role when its position as a low labour cost producer is being usurped by China.”

Terrorism, corruption and high levels of foreign debt also worry investors. On the plus side, there have been successful presidential elections, economic stabilisation and several recent privatisations. According to Inga Siwicka, a researcher at Forsyth Partners, the stocks currently favoured by fund managers that she monitors include some newly privatised banks, Telecom Indonesia, and Astra International. F&C's Williams says: “‘Indonesia is more expensive on an earnings basis than Thailand”.

In Singapore there is something rather different: an open, well developed corruption-free economy. On the other hand, Singapore's attempts to project itself as the financial centre of Asia may have been dealt something of a blow by the China Aviation Oil scandal. In addition economic growth is decelerating, although real growth in 2005/06 is still expected to be a robust 4.5 per cent or so.

Active encouragement of capital investment and a potential recovery in the property market in Singapore, as well as banking liberalisation, make companies like Keppel and City Land attractive. Fund managers are also looking at Singtel and at banking groups like DBS and United Overseas Bank. In general though, better bargains are to be had in Thailand and to a lesser extent in Indonesia.

Growth is set to slow somewhat in Thailand largely due to factors such as the oil price, bird flu and reductions in government development spending. Other concerns are those common to the region. These include the potential slowdown in export demand from the US. Parcelling out non-performing loans into separate entities has circumvented the banking problems that surfaced during the 1998 Asian currency crisis.

One big plus for Thailand is its development of industrial infrastructure, according to Robert Stockfis, a consultant investment analyst and long-time resident in the country. He says: “direct foreign investment by car and chemical companies is continuing. The country's eastern seaboard on the Gulf of Thailand is increasingly becoming the SE Asian hub on which companies base their regional export policy.” The concerns for investors remain the potential for ethnic tensions, highlighted by clashes between Thai security forces and members of the Muslim minority. There are continued concerns over ‘crony capitalism', worries over piracy in the Malacca Strait and Gulf of Thailand, and an appalling level of road deaths. Many of these go unreported but have an impact on the economy estimated by some at close 2.5 per cent of GDP. Nonetheless, as many fund managers observe, there is value around in Thailand. Favoured companies include Siam Cement, energy companies like PTT, banks like Bangkok Bank, and real estate businesses like Land House.

In Malaysia, stability is more entrenched but stock market value a little harder to find. The country has a well developed infrastructure, and the world's largest producer of rubber, palm oil and pepper and a major exporter of electronic components and semiconductors.

According to Forsyth Partners' Siwicka, the country's current economic indicators are positive. Many companies are reporting strong demand, an upbeat outlook and no particular cost pressures. Expectations are that robust domestic demand should keep GDP growth at around 6 per cent this coming year, higher than its neighbours to the North and South.

Malaysia's problem, such as it is, is the longer-term economic threat from undercutting by China. In addition, by regional standards its stock market is not especially cheap. A multiple of around 15 times regarded as off-putting by some fund managers. One likely event this coming year is some form of currency realignment. Malaysia's currency has been pegged at 3.8 to the dollar since 1998. At some point an adjustment will be made, and some fund managers pick companies with debt denominated in dollars as one way of playing this.

Investors seeking a diversified spread in these smaller soputh east Asian markets have a problem. Even for funds that don't invest in Japan, larger markets trump allocations to south-east Asian ‘tigers'. The asset split in F&C's Pacific Growth Fund, where Hong Kong, China, South Korea and Taiwan dominate, typifies this.

Redressing this balance could be an interesting opportunity for the fund management industry. It remains to be seen whether they will take it.