Most Asean economies to see accelerated GDP growth, above-average earnings gains: Goldman
MOST Asean economies are likely to see accelerating gross domestic product (GDP) growth and above-average earnings gains as they recover from Covid setbacks, Goldman Sachs said at its 2022 outlook media roundtable.
The US investment bank has upgraded Indonesia and Singapore to overweight, and Thailand to market weight.
"After 10 years of chronic under-performance of Asean against the region, valuations are generally at the lower end of their 20-year ranges and compare favourably to the rest of the region," said Tim Moe, chief Asia Pacific equity strategist at Goldman Sachs.
Goldman Sachs economists are forecasting Asean-5 GDP growth will accelerate in 2022 to 5.3 per cent from 3.2 per cent as the region recovers from the pandemic shock. This should drive mid-teens to 20 per cent growth in earnings per share for most markets.
Besides attractive valuations, Asean - having lagged behind in the whole "new economy" story which has been a powerful force in China over the last decade - is starting to come into its own.
"Asean is now seeing tangible evidence of the growth of the digital economy in its listed companies. The Internet sector now accounts for 4 per cent of the MSCI Asean index, and will soon be about 20 per cent once Sea's full index cap is included in the end-March index review," Moe said, noting that several other "new economy" listings are expected to be included in the index next year.
The strategist said the heavyweight financial sector, which accounts for 35 per cent of the MSCI Asean index, may benefit as the interest rate cycle starts to firm. Asean may attract more flows when investors begin to separate their emerging market (EM) strategies into China and EM ex-China as a separate asset class.
All these suggest a number of tailwinds for Asean, compared to the significant headwinds that have been blowing for the past decade, Moe said.
Singapore has been upgraded to an overweight largely because banks are 66 per cent of index earnings and are positively leveraged to a firming interest rate cycle. Furthermore, the digitalisation theme continues to gain traction, with Sea poised to be the largest index constituent.
"We expect 18 per cent total returns next year driven by 16 per cent EPS (earnings per share) growth, a nearly 4 per cent dividend yield and moderate Singapore dollar strength," Goldman Sachs economists said.
Indonesia has been upgraded to an overweight on the back of accelerating GDP growth and 19 per cent EPS gains as the economy recovers from the pandemic shock.
"Banks are 52 per cent of index earnings and we anticipate improvements in loan growth and return on assets along with valuation rerating. The digitalisation theme is also developing, which adds appeal," they said.
Thailand has been upgraded to market weight. Its economic recovery as reopening progresses should boost earnings by 15 per cent, especially as energy and chemicals account for 48 per cent of the index earnings, and Goldman is "generally constructive on these upstream sectors". However, valuation is higher than in some other parts of Asean and its bank sector fundamentals are weaker, leading to a more measured stance.
The arguments for the Philippines are similarly mixed.
"We project that earnings will recover 25 per cent off a low base, but see valuations as somewhat elevated, leading to a balanced allocation view, especially considering sparse trading liquidity and macro risks including the region's lowest vaccination levels and waning fiscal stimulus," Goldman Sachs economists said.
They retained Malaysia as underweight despite a sharp pickup in GDP growth in 2022 and inexpensive valuations after sustained underperformance. The economists are expecting negative earnings growth in 2022 and only mid-single digit gains in 2023 after a 56 per cent recovery in 2021. Near-term earnings risks have increased following the release of a stimulative 2022 budget which will be funded in part by a 33 per cent one-off special prosperity tax on listed companies with annual taxable income above RM100 million (S$32.5 million). The common corporate tax rate is 24 per cent.
"With no near-term earnings momentum and limited trading liquidity, investment prospects for other parts of Asean appear better," the economists said.
According to Goldman Sachs' estimate, investors are generally underexposed to the region. Foreign investors have net sold US$78 billion in emerging Asian markets since the January 2020 MSCI AC Asia Pacific excluding Japan index peak, which is the second largest period of net selling in absolute terms after the global financial crisis episode.
This persistent net selling has left global mutual funds nearly 800 basis points underweight the region and also 470 basis points underweight in China, also near decade lows.
Five risks were highlighted that could potentially challenge the regional equity markets: shortfalls in growth due to supply chain bottlenecks, virus persistence and policy shocks; interest rate risks; a sharp US pullback after 25 per cent gains in 2021; escalation in US-China tensions; and politics. Important political events next year that could impact the policy outlook include South Korea's presidential election in March, Australia's federal election in May, and China's 20th National Party Congress in October-November.
