SINGAPORE: Southeast Asian stocks are giving investors some respite as regional economies reopen after the easing of Covid curbs, bucking a global downturn this year.
Equities have been solid compared to those in North Asia, with rising consumption led by tourism and related industries, which comprise over 10% of the Association of Southeast Asian Nations’ gross domestic product.
The region, however, is not immune to global inflationary pressure and the US Federal Reserve’s aggressive rate hikes, the latter of which has resulted in capital flight. But analysts say the region will remain resilient thanks to large domestic markets and further supply-chain diversification from China.
As of Sept 28, the MSCI Asean Index – a gauge of the region’s most-tracked equities – was up 1.4% over the previous quarter in local currency terms. This outperformed the broader MSCI Asia Pacific ex-Japan and MSCI World indexes, which fell 9.6% and 2.9%, respectively.
MSCI Asean covers six regional markets, with Singapore accounting for over 30% of the index, Indonesia and Thailand about 20% each, and Malaysia 15%.
“Despite a slowdown in global economic growth within Asia, particularly Southeast Asia and India, the growth momentum remains strong,” said Mike Shiao, chief investment officer of Asia ex-Japan at Invesco, in comments to Nikkei Asia. “Asia offers diversification opportunities for global investors.”
Within Southeast Asia, Indonesia has been the most resilient this year given its large domestic market. As an exporter of oil and gas, minerals and palm oil, the region’s largest economy is also benefiting from higher commodity prices.
This year, shares of major Indonesian coal miner Adaro Energy have soared 63%. The country’s benchmark Jakarta Composite Index has gained 6% on the back of higher commodity prices, with the index hitting a yearly high in September.
Southeast Asia’s growth can be attributed to waning Covid and its associated cubs. Singapore ended pandemic restrictions in April, with the city-state’s tourism authority expecting 4 to 6 million international visitors for 2022 – 12 times more compared with last year. Indonesia ended testing requirements in May, while the Philippines and Thailand have both drastically scaled back entry restrictions.
Tourism-related consumption is categorised as an export in GDP calculations. Before the pandemic, export revenues from international tourism stood at about 20% for Thailand, 10% for the Philippines, and 9% for Indonesia, according to the United Nations World Tourism Organization.
“The spillover effect of the tourist rebound could lead to a strong recovery of activities and domestic demand,” said Shiao of Invesco. The removal of Covid-related entry curbs has lifted domestic and regional consumption in sectors like food and retail, with some beating pre-pandemic levels.
The Philippine’s Jollibee Foods reported revenue of 52 billion pesos (US$888 million) for April to June – up 42% from the same period a year ago – while profit nearly tripled to 2.8 billion pesos. The fast-food giant’s stock price climbed 16% over the last quarter, the best performer on the country’s stock exchange.
“We are pleased with our strong top-line growth led by our Philippine business, which delivered better-than-expected sales for the second quarter and got back to its pre-pandemic sales level,” said Jollibee CEO Ernesto Tanmantiong in an August statement.
Inflationary pressure in Southeast Asia has been less acute than that of developed markets, with the US and Europe having seen inflation hit historical highs. The Asean+3 Macroeconomic Research Office, an economic think tank, forecasts average inflation of 5.2% for its 10 Asean members this year.
Indonesia only started to raise interest rates in August, the first time in nearly four years.
The composition of the MSCI Asean index – with a relatively high ratio of banks as opposed to tech companies – is also helping amid rising global interest rates. Out of the top 10 constituents, seven banks comprise over 25% of the index, including Singapore’s DBS Group and Indonesia’s Bank Central Asia.
The resilience displayed by Southeast Asian stocks contrasts sharply with North Asian peers, which are highly susceptible to trade and heavily dependent on China.
In Asia, Hong Kong’s Hang Seng Index fell the most by 21% over the quarter, followed by Shanghai’s SSE Composite Index, down 11%, and the Taiwan Capitalization Weighted Stock Index and South Korea’s benchmark KOSPI falling 9% and 7%, respectively.
“We still believe that the China recovery from its lockdowns has been delayed and not derailed,” said Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management.
But he added that in addition to Beijing’s zero-Covid policy, “The property sector slowdown and the plunge in consumer confidence are slowing investment and consumption.”
This has shocked exporters of industrial metals, capital goods and upstream electronics, resulting in a sharp slowdown in South Korean and Taiwanese exports to China, both strongly dependent on exports to the world’s second-largest economy.
Taiwanese and South Korean purchasing managers indexes tumbled to 42.7 and 47.6, respectively, both hitting a more-than two-year low.
In September, the Asian Development Bank cut its 2022 growth forecast for China to 3.3%, down from 5.0% in April, while Southeast Asia’s has been raised to 5.1% from 4.9%.
Still, Southeast Asia is not immune to global risks from the rising dollar and the Fed’s tightening that is driving capital from emerging markets. A renewed spike in oil prices because of the worsening Russia-Ukraine situation could weigh on the region.
“Another potential risk would be an exodus of foreign capital due to rate hikes from central banks,” warned Yoon Ng, principal of Asia-Pacific distribution insight at Broadridge, a US-based investor communications company.
“But these economies are in a better fiscal position compared to decades ago,” she said, pointing to the Fed’s taper tantrum in 2013, when the market reacted strongly to the attempt to slow quantitative easing through bond and stock sell-offs.