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February 12, 2013 10:58 am
Investors in southeast Asia have had a great ride in recent years. Since the depths of the financial crisis, the region’s equities are comfortably among the world’s best performing. But following long, breathless rallies, investors are beginning to wonder if these markets are finally running out of steam.
Since the start of 2009, there have been few better places to invest. Indonesian stocks have risen 220 per cent, while Thailand and the Philippines have both risen 225 per cent. Over the same period, the MSCI emerging markets index is up 88 per cent, and the MSCI world index has added just 52 per cent. This year the rally has continued, with Manila and Bangkok both up by more than 10 per cent, following gains of more than 40 per cent in 2012.
As quantitative easing and weak growth prospects in the west push investors to look to emerging markets, the region has benefited from a particularly compelling sales pitch.
With a young population of more than 600m people, rich natural resources, and growing trade links to China and India, the region is at the centre of Asia’s economic boom. Incomes are rising fast, as are corporate profits. Infrastructure spending is set to soar as governments look to exploit record low funding costs, while higher wages in China are helping to bring export businesses south.
As a result, the region has enjoyed enviable growth rates, far less dependent on the economic gyrations in developed markets than export-driven countries such as Taiwan and South Korea. The Philippines economy grew 6.6 per cent in 2012, Indonesia expanded 6.2 per cent, while Thailand’s central bank recently raised its own forecast for 2012 growth to 5.9 per cent.
“The story in the Philippines and Thailand is of job creation, a good level of wage growth and a relatively underleveraged consumer . . . it’s a very good consumer environment,” says Adrian Mowat, head of Asia equity strategy at JPMorgan.
But the strong performance has left markets trading at giddy valuations. The Philippines index currently trades at a price to book ratio of 2.6 and a price to earnings ratio of 20.8. Thailand fares much the same, at 2.3 times book and 18.3 times earnings. And Indonesia, despite underperforming its neighbours last year, is at 2.7 times book and 18 times earnings, compared to an emerging markets average of 1.6 times book and 12.3 times earnings.
“The conflict we have is that we love the fundamentals, but we don’t like the price,” says Timothy Moe, chief Asia equity strategist at Goldman Sachs. “We think the region will probably take a bit of a breather in relative terms.”
Meanwhile other parts of Asia have become more attractive. Since the start of December, Chinese equities have risen more than 30 per cent, on the back of improving economic data, financial reform, and a successful once a decade power transition.
Japan too is back in fashion. The Nikkei 225 has also jumped more than 30 per cent since mid-November, on expectations the election of prime minister Shinzo Abe will herald the start of far more aggressive monetary stimulus. The yen has, in turn, weakened from under 80 per dollar to around 94 in a matter of weeks. Japanese exporters, long hampered by a strong currency, have led the Nikkei’s charge.
As a result, some investors are switching their focus away from southeast Asia towards these two large, liquid markets.
Emerging markets: News and comment from more than 40 emerging economies
“From a valuations perspective you can see why people are looking more at north Asia,” says Catherine Yeung, investment director at Fidelity. Though the economic fundamentals in southeast Asia still look good, it has become a “very overcrowded trade”.
That sense of overcrowding is made worse by the size of the markets. The combined market capitalisation of the Malaysian, Indonesian, Thai and Philippines equity markets is around $345bn, similar to Sweden or Taiwan, and far smaller than Brazil.
The region is also not risk-free. Previous periods of strong investment inflows, and the resultant currency appreciation, prompted some governments to act in the form of capital controls. Interest rates remain at historic lows, raising fears that inflation problems may return, while elections in Malaysia this year and in Indonesia in 2014 add a level of political uncertainty.
However, many investors remain bullish. Morgan Stanley and Deutsche Bank are among those who include Thailand in their 2013 equity market picks, while JPMorgan recently upgraded Indonesia to overweight.
When it comes to valuations, investors should view such markets like buying “expensive mid-cap growth stocks, because the fundamentals are so attractive”, says Mr Mowat. He believes the growing appeal of Japan and China will not torpedo the southeast Asian rally as investors are more likely to fund their trades by selling Taiwanese and South Korean holdings.
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