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South-east Asian equities: the good news and bad news for investors – US

Many of Southeast Asia’s emerging markets (EMs) have achieved some of the strongest economic growth rates in the world. Malaysia’s economy expanded 8.9% year-on-year in the second quarter, while the Philippines’ economy grew 7.4% over the same period.

The Association of Southeast Asian Nations (ASEAN) EMs of Indonesia, Malaysia, the Philippines and Thailand are a contrasting group with different growth drivers. Common to all countries this year is the benefit of reopening their economies after the pandemic, which has lagged other global economies.

From an equity market perspective, all ASEAN markets outperformed the broader emerging markets, down -18.6% year-to-date in dollar terms, as measured by the September 13 MSCI Emerging Markets Index. is also resilient. However, ASEAN’s results are quite different, from Indonesia, which posted a +12% year-to-date gain, to the Philippines, which is down -13.5% year-to-date. This is despite weaker currencies in all four markets.

A question arises here. Are there opportunities within the ASEAN region?

Where will economic growth go from here?

Economic growth across ASEAN economies is picking up as activity restrictions introduced during the Covid-19 crisis are gradually lifted. Rising commodity prices earlier this year also benefited Indonesia and Malaysia. Thailand has lagged behind on this front, with her GDP growth picking up very modestly at 2.5% year-on-year in the second quarter.

However, with the relaxation of entry requirements, tourism is recovering, with July arrivals surpassing 1 million for the first time since the outbreak of the pandemic. Tourism accounted for more than 20% of his pre-pandemic GDP, and rising tourist numbers have led to consumer confidence.

The growth outlook is more mixed, increasingly overshadowed by rising inflation, and now respective central banks are raising interest rates. Rising energy and food prices are also having an impact on fiscal policy. For example, Indonesia recently announced compensatory cash allowances for low-income families and workers ahead of her 30% hike in fuel prices. Malaysia has not launched energy subsidies in its budget, but these are expected to be higher given rising oil prices.

Commodity prices, especially for industrial metals, are currently falling. This could affect foreign account balances in Indonesia and Malaysia. Meanwhile, the outlook for merchandise exports is clouded by expectations of a slowdown in global trade.

In Indonesia, long-term reforms based on the Omnibus Act, a series of changes to tax and labor market laws, are a key supportive measure and should help improve productivity and output. There are already signs that these are working, such as a pick-up in foreign direct investment (FDI). The increase in FDI is also related to the relocation of manufacturing bases from China as companies move towards diversifying their supply chains. Malaysia has also benefited from this trend.

political risk

Another factor to keep in mind is politics.

The Philippines elected a new leader in May, with Ferdinand “BonBon” Marcos in power. Despite some populist policy rhetoric in the campaign, policy priorities so far appear to be market-friendly. Still, close monitoring is required.

With general elections scheduled by July 2023 in Malaysia, there is speculation that this could be imminent, with the potential for increased uncertainty over policy prospects. Former Prime Minister Najib Razak had his appeal dismissed in August and he was sentenced to 12 years in prison on charges of breach of trust, money laundering and abuse of power. He has applied for a royal pardon and will remain a Member of Parliament until a decision is made.

The political landscape is increasingly fragmented, and there are concerns that progress on much-needed structural reforms could be limited without sufficient political consensus. There is some hope of some improvement in the political outlook, but this is not yet clear.

Thailand is scheduled to hold general elections by March 2023. Prior to the Covid-19 pandemic, Thailand was experiencing anti-government protests, and recent polls show the opposition Thai party is broadly in the lead, with Phaethorn Shinawatra as the front-runner for prime minister. I’m here.

Petong Tarn is the daughter of former Prime Minister Thaksin, who was deposed in a military coup in 2006, and the niece of former Prime Minister Yingluck, who was ousted from power by the Constitutional Court in 2013. The Constitutional Court recently suspended the current prime minister. Minister Prayut Chan-ocha has exceeded the constitutionally mandated eight years of his tenure. This could lead to early elections until a final decision is made.

policy tightening

As in most economies around the world, inflation is rising across ASEAN, albeit from low levels. This is most notable in Thailand, where headline inflation hit 7.9% y/y in August, well above his 2% target. Inflation is also above target in the Philippines and nearing the high end of its target range in Indonesia. Malaysia’s central bank has not set a clear inflation target.

Southeast Asia Chart 2.jpg

ASEAN central banks have started taking steps to curb inflation this year. The central bank of the Philippines raised a total of 175 basis points (bps) to 3.75% and the central bank of Malaysia raised its key interest rate by 75 basis points to 2.5% this year. Central banks in Thailand and Indonesia have been slow to react and only started raising policy rates in August. It’s the first rate hike since 2018.

However, it is worth noting that despite these developments, real policy rates in Malaysia and Thailand are still stuck in negative territory.

Southeast Asia chart 3.jpg

evaluation

The overall valuation of each ASEAN index market varies, reflecting in part the nuances of each outlook and the sector and equity opportunities available in each market.

Southeast Asia Chart 4.jpg

On a combined basis (price-to-earnings ratio, price list ratio, and dividend yield) valuations in Thailand, the Philippines and Indonesia are slightly below their historical medians, but not cheaply compared to other EMs. Malaysia and Thailand also have the lowest profitability among emerging markets, although Malaysia has seen little improvement since her 2019 and Thailand’s return on equity has deteriorated somewhat.

Malaysia is one of those markets that looks cheap, especially if the windfall tax on banks is phased out in 2023. However, the macroeconomic outlook faces a range of long-term challenges that are at least partially responsible for the cheapness.

Southeast Asia Chart 5.jpg

The situation is similar for ASEAN currencies. All four currencies are cheap, but unattractive compared to other emerging economies.

Complex situation in emerging markets in Southeast Asia

The good news for emerging Southeast Asia is that these economies are recovering and beginning to benefit from a broader economic reopening. After the tough times of the pandemic, this is most welcome.

The bad news is that much of this reopening has been anticipated by the market and reflected in valuations. In addition, there are various challenges that can weigh on your outlook. At market level, we do not favor ASEAN EM. However, there are some interesting equity opportunities in the region that require a more specific and comprehensive assessment for each emerging ASEAN country.

In Indonesia, reforms are supportive over the long term, but overall valuations are less attractive. In Malaysia, valuations are reasonable, but political uncertainty continues to cloud the outlook. Thailand is positive about reopening tourism, but the domestic economy remains weak. Political risks are also on the rise ahead of legislative elections. At the same time, there are some attractive companies in all three markets.

The Philippines is perhaps the least favored Southeast Asian emerging country. The service-oriented economy is recovering, but valuations are unattractive and bottom-up stock opportunities are limited.

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