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December 16, 2013 7:42 am
Rising interest rates, slowing economic growth, political uncertainty and a stronger US dollar – any one of these factors could spell trouble for the small, volatile markets of southeast Asia. But in 2014, the region looks set for the perfect storm of all four.
The contrast to a year ago is stark. Back then the three “TIPs” markets – Thailand, Indonesia and the Philippines – were riding high as investors snapped up stocks in these consumer-driven economies. Unlike the export-heavy countries further north, southeast Asia was seen as a relative haven in times of moribund global growth.
That euphoria hit a brick wall in May with the first mention by Ben Bernanke, Federal Reserve chairman, of the possible scaling back, or “tapering”, of its asset purchases some time this year. On May 21, the day before Mr Bernanke spoke, the Philippine stock index closed at a record high, while Thailand hit a 20-year pinnacle. Indonesia had reached an all-time high a day earlier.
Within weeks, the three markets slumped into bear market territory, and none has fully recovered since the region’s frailties were exposed during the summer “taper tantrum”, which hit developing markets globally.
Soek Ching Kum, head of southeast Asia research at Credit Suisse Private Banking, says the region’s still-high valuations are likely to prove a drag once tapering finally begins.
“We do expect southeast Asian markets to do less well than north Asia, at least for the first half of next year. Big global factors will overshadow the local factors to a large extent,” says Ms Kum.
Despite the falls of the past six months, Indonesia, Thailand and the Philippines continue to trade at a premium to the MSCI Asia ex-Japan index. The Philippines index, for example, has dropped from a forward price to earnings ratio of 22 times back in May to a current valuation of 16.8 times estimated full-year 2013 earnings. Yet that compares with a regional average of 12.4 times forward earnings and a historical average ratio of around 14 times.
Although Ms Kum, like many analysts, expects the fallout from the actual onset of tapering to be more modest than over the summer, each country in the region also faces increasing local headwinds.
For Thailand and Indonesia, politics poses a significant threat. Goldman Sachs, Nomura and Bank of America Merrill Lynch are among those recommending clients hold an underweight position in both countries.
Recent unrest in the Thai capital has already spilled into the equity market. Foreigners took $325m out of the Thai market last week alone, helping pull the index down to its lowest level since September and solidly into negative territory for the year.
We do expect southeast Asian markets to do less well than north Asia, at least for the first half of next year. Big global factors will overshadow the local factors to a large extent
- Soek Ching Kum, Credit Suisse Private Banking
Politics aside, the Thai economy already faces growing problems. Household debt has soared to around 80 per cent of gross domestic product since 2008, making it among the highest in Asia. Meanwhile, wage growth has stalled as government programmes to boost consumption come to an end.
Daiwa Securities recently cut its Thai growth estimate for this year from 3.7 per cent to 2.9 per cent, and shaved 3 per cent off expected full-year earnings.
In Indonesia, investors are weighing up the potential risks from the country’s presidential election to be held before July, as well the country’s stubborn deficit problems – the main source of concern earlier this year.
Hozefa Topiwalla, head of Asean research at Morgan Stanley, says Indonesia’s equity market correction has merely priced in the “new normal” of slower growth, and that the index is now closer to fair value.
Even the Philippines, which was Asia’s fastest-growing economy in the second quarter, has its own worries. The devastating impact of Typhoon Haiyan last month is expected to dent the economy in the fourth quarter of 2013 and the first half of 2014, and to fuel inflation due to reduced agricultural output.
HSBC expects growth to drop from 6.8 per cent this year to 5.8 per cent next year, while the consensus among analysts points to a halving of earnings growth in 2014.
The rising US dollar – historically a negative for emerging markets globally – is also likely to have an impact. Over the past month, the Thai baht, the Philippine peso and Indonesia’s rupiah have been the three worst performing currencies in emerging Asia.
However, some investors remain upbeat. Wing Kin Chow, portfolio manager at Eastspring Investments, says valuations are beginning to “look interesting”, and plans to use any further pullback as an opportunity to buy.
“Our view is that long term these markets remain some of the strongest in the region,” says Mr Chow. “Following the correction, markets have already discounted much of the bad news.”
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