Asean equities steal the spotlight with a second-half surge, driven by growth and financial stocks

FOLLOWING a volatile first half, Asean stocks rebounded sharply in the second half of the year, propelled by the Federal Reserve’s recent rate cuts as investors flock to regional markets seeking attractive dividend yields and stability amid global monetary shifts.

The MSCI AC Asean Index, which tracks the performance of mid and large-cap companies across Singapore, Indonesia, Malaysia, Thailand and the Philippines, is up close to 16 per cent year to date as at Monday (Sep 30).

Prospects for the final quarter appear sanguine.

“It is now time for Asean equities to shine,” said DBS chief investment officer Hou Wey Fook in the bank’s latest CIO Insights issued on Monday.

“The performance of equity markets in Q3 reflects major shifts in portfolio positioning as investors adjust their exposures to ride the wave of Fed monetary easing. With further Fed rate cuts and dollar weakness on the horizon, Asean equities are poised to outperform,” he said.

Asia’s real estate investment trusts (Reits) are prime beneficiaries of rate cuts given their high gearing and sensitivity to funding costs, Hou noted, adding that he is overweight on Singapore Reits as an income generator in one’s portfolio.

Across the region, the performance to date has been positive.

Indices in Singapore, the Philippines, Indonesia, Thailand and Malaysia have climbed, recording gains ranging between 2.3 (Thailand) and 13.4 per cent. The top performer among the Asean-5 is Malaysia, with its key index rising 13.4 per cent year to end-September. The Straits Times Index has climbed 10.6 per cent this year.

Vietnam’s Ho Chi Minh Stock Index posted a 14.1 per cent gain year to date, driven by a combination of factors from economic recovery, strong sector performance – chiefly finance – positive market sentiment, and upbeat global economic conditions.

Tan De Jun, portfolio manager of the research and portfolio management team at FSMOne Singapore, pointed out that the region’s financial sector has fared strongly, with gains led by banking stocks in Singapore and Malaysia on the back of robust quarterly earnings.

“Additionally, the Fed’s dovish comments have shifted global investors’ attention towards Asean banks, which provide a lucrative and stable dividend yield of about 4 to 6 per cent,” he said.

On the other hand, the consumer discretionary segment recorded the worst sector performance as weak domestic demand in Asean manifested itself in the underperformance of service-oriented sectors, noted JPMorgan Asset Management’s global market strategists Raisah Rasid and Adrian Wong in a recent note.

Both, however, believe that the underlying factors that have weighed on domestic demand will begin to fade, thus helping the service sector turn the corner.

“Post-election government spending programmes in Indonesia, wage reforms in Malaysia, and the potential implementation of the digital wallet scheme in Thailand should bolster domestic consumption,” said Raisah and Wong.

Heading into the fourth quarter, market watchers believe the prospects for Asean equities are positive, and have identified a couple of factors that make them an attractive investment option.

Bank Indonesia unexpectedly reduced its key interest rate by 25 basis points in September, with more Asean central banks set to ease policy rates in the coming months.

This imminent shift in monetary policy could in turn support the broadening of equity performance beyond the growth sectors towards core value sectors, said Raisah and Wong.

In the medium term, they expect earnings growth of Asean equities to be supported by structural factors, such as ongoing shifts in supply chains towards countries like Vietnam.

Tan highlighted that Asean’s share of global foreign direct investment is showing an uptrend. He believes that, besides growth driven by booming exports and the influx of tourists, this trend is sustainable in the near future as businesses look to diversify their supply chains beyond China.

Asean stocks are also well-positioned as an attractive option for income generation, thanks to their relatively higher payout ratio.

“Current consensus estimates for (Asean’s) earnings growth this year stand at 15.3 per cent, outpacing the 10 per cent expected for US equities,” said Raisah and Wong.

Equity markets in Hong Kong and mainland China have surged recently, buoyed by the Chinese authorities’ efforts to revive the country’s battered economy with an aggressive monetary policy stance and hints of upcoming expansionary fiscal policies that target consumer spending.

The Hang Seng Index and Shanghai Composite Index have risen 24 per cent and 12.2 per cent year to date, respectively, as at Monday’s close. In fact, on Monday, the Shanghai Composite had its best one-day percentage gain since 2008.

“Beyond a short-term rebound, although it is premature at this point to assess, we cannot rule out that this could be the start of a sustainable bull market if Beijing delivers sufficiently sizeable stimulus to successfully drive a turnaround in macro fundamentals,” said Eli Lee, chief investment strategist at Bank of Singapore (BOS) in a note on Monday.

The BOS team continues to favour quality yield stocks and sees large-cap Internet and platform companies with healthy growth outlooks as beneficiaries.

As for Japan, the victory of Shigeru Ishiba in the ruling party’s leadership race wrong-footed investors, resulting in a short-term pullback in equities. The benchmark Nikkei 225 lost 4.8 per cent on Monday, but is up 13.3 per cent year to date.

According to Bank of America strategists in a note, the stock market fluctuations following the party’s presidential elections could be “temporary”.

Looking ahead for Japanese equities, the team believes that investor attention could turn towards renewable energy-related names, defence-related companies, as well as construction stocks by association, should policies focus on disaster prevention and mitigation.

Meanwhile, US stocks have been on a bull run thus far this year, with the Dow Jones Industrial Average, the broad-based S&P 500 and the tech-rich Nasdaq Composite Index up 12.3 per cent, 20.3 per cent, and 20.7 per cent, respectively, as at last Friday’s close.