Global risk assets may be tumbling after the Federal Reserve’s hawkish pivot, but the modest reaction in Southeast Asian markets points to a pocket of resilience that offers opportunities to investors.
High exposure to cyclical sectors, key trading partner China in stimulus mode and the potential from easing lockdowns are bolstering views that the region’s stocks and bonds can withstand Fed rate hikes that have historically weighed.
An MSCI gauge of Southeast Asian, or Asean, equities fell less than 2% this week and rose to an 18-month high relative to the Asia benchmark, which slumped almost 5%.
“Asean is now less vulnerable than in the past as current account balances have improved and valuations on equities, bonds and currencies are less demanding,” UBS Group AG strategists including Niall MacLeod wrote in a note Thursday. “Markets are in a much better position relative to 2013.”
The potential for a faster pace of Fed hikes has sent global bond yields soaring, triggering a broad equity rotation into value stocks and out of high-priced growth names.
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That’s favouring markets such as the Philippines, Thailand and Singapore -- which have high exposure to sectors like financials and industrials. Their benchmarks were among the top performers this week in Asia while markets laden with expensive tech shares like South Korea and Hong Kong underperformed.
While Asean markets struggled the most during the so-called taper tantrum in 2013, due to a build-up in credit and deteriorating macro balances, current accounts in countries such as Indonesia are looking healthier now, according to UBS.
Rotation Situation
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Banks, energy and stocks that can benefit from reopening economies look set to beat other sectors in such an environment. Financials and energy shares make up almost 40% of the region’s benchmark, with less than 2% in tech shares, according to data compiled by Bloomberg.
On Friday, Thailand maintained its economic growth outlook as the easing virus situation is expected to support local spending and a tentative resumption of tourism. The country will resume a quarantine-free visa program for vaccinated visitors in February. Meanwhile, Indonesia lifted a ban on all foreign arrivals in a bid to keep its economy going, while the Philippines is also removing restrictions.
Conditions this year are “ripe to see an outperformance and perhaps rotation from North to South and Southeast Asian” markets such as Indonesia and the Philippines, which are relatively cheaper, said David Chao, global market strategist for Asia Pacific ex-Japan at Invesco Ltd.
Reflecting the optimism, 12-month forward earnings estimates for the Asean gauge have started climbing once again after a steep drop toward the end of 2021. They look to have bottomed, on both an absolute and relative basis.
Bond Cushion
A better monetary backdrop also boosts the relative attractiveness of Southeast Asian debt.
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Indonesia’s central bank has been actively buying government bonds and the rupiah to ensure market stability, keeping 10-year yields under 6.5% for about seven months. And while Singapore’s yields face upward pressures from Treasuries, any rise could be limited because its central bank uses the exchange rate to keep inflation in check rather than borrowing costs.
Overall, a gauge of emerging Asia local currency bonds has risen about 1% over the last 12 months, versus a fall of almost 6% in the Bloomberg Global Aggregate Total Return Index.
“We certainly have been looking at Asia as a good place to be right now,” said Elisabeth Colleran, a portfolio manager for emerging market debt at Loomis Sayles & Co. “You are starting from a better cushion in Asia” in terms of higher spreads compared to US peers too, she said.
Photo: Bloomberg
