US Federal Reserve hikes, decades-high inflation and COVID-19 lockdowns in China are only adding to investor bets that Southeast Asia’s 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 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, data showed.
“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.
Unencumbered by border restrictions in China and Japan, Southeast Asian economies are being supported by the revival of tourism, an industry which contributed 12 percent of their GDP in 2019, the World Travel and Tourism Council said.
Vacation bookings are rising as Thailand, Malaysia and Indonesia offer quarantine-free entry for vaccinated travelers, 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.”
The region is 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 other goods, helping drive gains in related shares.
The Jakarta Composite Index is the best-performing major benchmark in Asia this year, up nearly 10 percent 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 Fed kicking off an aggressive campaign of interest rate hikes, something that has weighed on the region’s assets in the past.
The effect of any policy tightening should at least seep through to earnings for financial firms, which make up almost 40 percent 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 wrote in a note last month.
Southeast Asian stocks also stand out as a haven with expensive US shares hit by rising rates and European stocks under pressure from the impact of the war in Ukraine.
International investors rotating out of China allocations “has indirectly benefited select Southeast Asian markets,” SC Asia global equities portfolio manager Sid Choraria said. “I expect this to continue as long as China concerns persist.”
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