Asian stock market stars could see more tailwinds even as the world tightens
(Bloomberg) – Fed hikes, decades-high inflation and Covid lockdowns in China only add to investor bets that Southeast Asian stock markets could be one of the best places to park their money right now.
Buyers are touting an economic reopening and the region’s attractiveness as a hedge against rising commodity prices, helping the MSCI Asean index emerge from a three-year relative downtrend against its global counterpart . Foreign funds have bought Southeast Asian stocks every month this year, with total inflows of $10 billion so far, according to data compiled by Bloomberg.
“There has certainly been a resurgence of interest in Asean,” said Alexander Treves, head of Asia-Pacific equity investment specialists at JPMorgan Asset Management. “Cyclically, Asean is coming out of a pretty tough Covid period and so they’re taking advantage of that and there are markets like Indonesia, which are also commodity exporters.”
Freed from China and Japan’s border restrictions, Southeast Asian economies are buoyed by the revival of tourism, an industry that contributed 12% of their gross domestic product in 2019, according to World Travel & Tourism. Council.
Ticket bookings are up as Thailand, Malaysia and Indonesia offer quarantine-free entry for vaccinated travellers, while Singapore has mostly returned to pre-pandemic life.
“Countries in Southeast Asia have all reopened with very few travel restrictions, so I think there should be an increase in tourism and consumer activity, especially as the season approaches. summer travel,” 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 acts as an inflation hedge as the war in Ukraine pushes global commodity prices higher. Malaysia is a net exporter of oil while Indonesia ships coal, palm oil and natural gas, among others, helping to drive gains in related stocks.
The Jakarta Composite Index is Asia’s best-performing major benchmark this year, up almost 10% and nearing a record high. The expanded Southeast Asia gauge is on track to outperform the MSCI All Country World Index for a second consecutive quarter.
The outperformance came despite the Federal Reserve launching an aggressive interest rate hike, which has weighed on assets in the region in the past. For now, investors are giving local central bankers the benefit of the doubt on their ability to successfully manage the shift to tighter monetary policy even as inflation continues to spread.
The impact of any policy tightening will at least trickle down to the earnings of financial companies, which account for nearly 40% of the Southeast Asian benchmark.
Singapore and Indonesia have the region’s largest exposure to financials and “our view is particularly constructive in these two markets for the months ahead,” wrote strategists at Deutsche Bank International Private Bank, including Stefanie Holtze-Jen. , in a note at the end of April.
Southeast Asian equities also stand out as something of a safe haven with expensive US equities hit by rising rates, European equities under pressure from the impact of Russia’s invasion of Ukraine and Chinese stocks pricing in slower growth thanks to Beijing’s unwavering Covid-Zero strategy.
The rotation of international investors out of Chinese allocations “indirectly benefited some Southeast Asian markets,” said Sid Choraria, global equity portfolio manager at SC Asia. “I expect that to continue, as long as China’s concerns persist.”
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