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The Asian markets that should do well but aren't

Despite strong economic growth, Southeast Asia markets have lagged the performance of the wider benchmark

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The MSCI Asean Index, which includes Indonesia, Singapore (above), Malaysia, the Philippines and Thailand, is up just 4.7 per cent this year, trailing the 8.2 per cent gain in the wider MSCI Asia Pacific Index and the MSCI Emerging Markets Index's 8.7 per cent surge.

UNDERNEATH the surface of the solid stockmarket rally across Asia, there's one spot where investors are seeing signs of some sputtering: Southeast Asia.

Despite strong economic growth and bullish expectations for the future, markets there have lagged the performance of the wider benchmark. The MSCI Asean Index, which includes Indonesia, Singapore, Malaysia, the Philippines and Thailand, is up just 4.7 per cent this year, trailing the 8.2 per cent gain in the wider MSCI Asia Pacific Index and the MSCI Emerging Markets Index's 8.7 per cent surge.

Foreign investors have already pulled almost US$480 million out of equities from the latter three countries this month, with Indonesia bucking the trend by posting a modest US$134 million inflow, data compiled by Bloomberg showed. All four have seen withdrawals from US-listed exchange-traded funds in recent days.

There's plenty of potential factors that may be driving the relative equity weakness through the first two months of the year: progress made on a trade deal between the US and China, while a net positive for the region given the stress on tightly connected supply chains across multiple export-driven economies, nevertheless dampens the long-term potential for Southeast Asia as a manufacturing haven for companies looking to shift production out of China on the threat of extended tariffs.

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The US dollar, which climbed 3.2 per cent last year according to a Bloomberg gauge, has edged higher, even with the Federal Reserve adopting a more dovish stance. A strong dollar generally makes emerging-market investments less attractive, and the Asean index took it on the chin with its worst annual loss since 2015 last year.

MSCI Inc's decision to boost the weighting of China's domestic A shares in its various indexes will lead to billions in flows as active and passive funds rebalance their positions in response. But that's at the expense of other markets in the region. The Philippines has been hit especially hard by the decision, pulling back in the wake of the announcement after coming close to a bull market earlier this year.

Earnings in the region have disappointed. Citigroup Inc just cut its target for Malaysia's benchmark stock index, the poorest performer in Southeast Asia this year, due to downgrades in company price estimates as profit misses have outnumbered beats.

There are also upcoming elections in Thailand, Indonesia and the Philippines that add an extra dash of uncertainty.

Short-term concerns aside, the region still looks attractive to some investors.

After all, the economy in Southeast Asian nations has been expanding at a fast pace and, even though it's slowing there too, it's still an enviable growth. For this year, economists forecast gross domestic product will rise more than 5 per cent in the Philippines and Indonesia, 4.5 per cent in Malaysia and 3.8 per cent in Thailand, data compiled by Bloomberg showed. In Singapore, considered a developed market, it'll increase 2.6 per cent, they estimate.

"We see a lot more sustainable growth in Asean," said Pauline Ng, a manager with JPMorgan Asset Management who runs the firm's Asean equity fund, in a recent interview. "Infrastructure investment has already happened. We are also starting to see Asean as an alternate manufacturing base to China. We're seeing growth in tourism, we're seeing recovery in the banking sector."

The region's emerging middle class is also a positive sign, so while a V-shaped recovery is not expected, the foundation is much better than in the recent post-financial crisis past, she said. BLOOMBERG