A rally in Southeast Asian stocks may persist even if a Trump-induced trade spat with China erupts, as strategists see the region offering shelter from any global fallout.
After taking a dive as expectations for faster US interest-rate hikes damped their appeal, Asean’s emerging share markets have rebounded sharply in the past couple of weeks. The Philippine Stock Exchange index has led the way, surging 10 percent since December 23, 2016, followed by a 6.1-percent increase in the Jakarta Composite Index. Thailand’s benchmark gauge rose to the highest since March 2015, while Malaysian shares reached a two-month high.
President-elect Donald J. Trump’s appointment of China hawks to key positions in his administration has investors bracing for rising trade tension between the world’s two biggest economies. With large domestic markets and less reliance on exports, strategists and fund managers see Southeast Asian economies and companies as better placed to cope than their north Asian counterparts.
“The tension between China and the new US administration should benefit Southeast Asian countries,” said Win Phromphaet, the Bangkok-based chief investment officer at CIMB-Principal Asset Management Co., which oversees around $3 billion of Thai assets. “Foreign investors may choose to shift their investments in the region from China to avoid trade barriers.”
Win said he had been advising clients to add to equity holdings in Southeast Asia because of the region’s strong economies and corporate earnings growth. Indonesia, which has a population of 258 million, looks like a good place to take shelter from the turbulence, according to Clive McDonnell, the Singapore-based head of emerging-markets equity strategy at Standard Chartered Plc.
“Given the uncertainties over President-elect Trump’s policies on trade, we would like to be in markets that are more defensive,” he said. Indonesia stands out as it has a lower export-to-GDP ratio and a higher weight toward domestic-oriented industries in its stock market, he said. McDonnell said he was most positive on the country, along with India, in developing Asia.
Fed minutes
The MSCI South East Asia Index, which also includes Singaporean stocks, fell more than 6 percent in the four sessions after Trump’s shock victory last November 8. It then recouped around half of those losses before dropping again in the two weeks through December 23. The gauge has rebounded 5.5 percent since then. US Federal Reserve (the Fed) minutes released last week showing the US central bank may be more dovish than previously thought are also improving sentiment toward the region.
The Jakarta Composite Index fell 0.3 percent as of 11:07 a.m. in Jakarta, the Malaysian benchmark declined 0.2 percent, while the Philippine measure was little changed. Thailand’s SET Index lost 0.3 percent.
While thin trading over the holiday period may have exacerbated the stock moves, it looks like a relief rally based on a more dovish Fed, said Sean Quek, the head of equity research at Bank of Singapore Ltd. in the city-state. The impact from US-China trade tension might be less severe on Southeast Asia but it still wouldn’t be positive, he said.
The trade issue, along with rising US borrowing costs and currency vulnerability, were the main reasons Bank of Singapore was maintaining the underweight call it put on Asia ex-Japan stocks shortly after the US election, Quek said. “If things do get very negative on the trade front, I think it’s hard to see anyone in the region not being affected,” he said.
Foreign funds pulled almost $4 billion from the Indonesian, Thai, Malaysian and Philippine share markets last November and December, according to exchange data. The flows have started to reverse with $226 million of inflows so far this year, as a Bloomberg gauge of the dollar’s strength had its first back-to-back weekly decline since September 2016.
“It’s all about the pullback in the dollar” and robust economic growth rates in Southeast Asia, said Frederico Ocampo, the Manila-based chief investment officer at BDO Unibank Inc., the largest money manager in the Philippines.
The declining share prices pushed the 12-month price-to-earnings ratio on the MSCI South East Asia Index to as low as 14.2 last December 23 from a high of 15.3 last August. The gauge is now trading at the smallest premium to the MSCI World Index since 2008.
“The fundamentals of many companies in Asean remain solid and valuations are getting more attractive,” said Voravan Tarapoom, the Bangkok-based CEO at BBL Asset Management Co., which oversees around $16 billion. “If the US economy fails to meet market expectations, there would be a good chance that capital could flow back into Asean.”