Fed hikes, decades-high inflation and Covid lockdowns in China are only adding to investor bets that Southeast Asia’s stock markets may be one of the best places to park their money right now.
Buyers are touting an economic reopening and the region’s attraction as a hedge against higher commodity prices, which is helping the MSCI Asean Index break out of a three-year relative downtrend versus its global peer. Foreign funds have been net buying Southeast Asia shares every month of this year, with total inflows of US$10 billion so far, Bloomberg-compiled data show.
“There has definitely been a pickup in interest in Asean,” said Alexander Treves, head of investment specialists for Asia Pacific equities at JPMorgan Asset Management. “Cyclically, Asean is emerging from quite a tough Covid period and so it’s benefiting from that and there are markets like Indonesia, which are also commodity exporters.”
Unencumbered by the border restrictions of China and Japan, Southeast Asian economies are being supported by the revival of tourism, an industry which contributed 12% of their gross domestic product in 2019, according to the World Travel & Tourism Council.
Ticket bookings are on the rise as Thailand, Malaysia and Indonesia offer quarantine-free entry for vaccinated travellers, while Singapore has mostly returned to pre-pandemic life.
“Southeast Asian countries have all reopened with very little travel restrictions so I think there should be a boost in tourism and consumption activity especially as we head into the summer travel season,” said David Chao, global market strategist for Invesco Ltd in Hong Kong. “Southeast Asian risk assets look more attractive than North Asian equities.”
Meanwhile, the region is acting as an inflation hedge as the war in Ukraine pushes global commodity prices higher. Malaysia is a net oil exporter while Indonesia ships coal, palm oil and natural gas among others, helping drive gains in related shares.
The Jakarta Composite Index is the best-performing major benchmark in Asia this year, up nearly 10% and hovering near a record high. The broader Southeast Asia gauge is on track to outperform the MSCI All Country World Index for a second straight quarter.
The outperformance has come despite the Federal Reserve kicking off an aggressive campaign of interest rate rises, something which has weighed on the region’s assets in the past. For now, investors have been giving local central bankers the benefit of the doubt that they can successfully manage the shift to tighter monetary policy even as inflation continues to spread.
The impact of any policy tightening will at least seep through to earnings for financial firms, which make up almost 40% of the Southeast Asian benchmark.
Singapore and Indonesia have the region’s largest exposure to financials and “our view is particularly constructive on these two markets for the months ahead,” Deutsche Bank International Private Bank strategists including Stefanie Holtze-Jen wrote in a note in late April.
Southeast Asian stocks also stand out as a haven of sorts with expensive US shares hit by rising rates, European ones under pressure from the impact of Russia’s invasion of Ukraine, and Chinese equities pricing in a growth slowdown thanks to Beijing’s unwavering Covid-Zero strategy.
International investors’ rotating out of China allocations “has indirectly benefited select Southeast Asian markets,” said Sid Choraria, global equities portfolio manager at SC Asia. “I expect this to continue, as long as China concerns persist.”