Asean equities: Reopening and recovery underpin a positive view
ASEAN equities struggled in 2021, with a return of minus 3 per cent. But they have so far remained relatively resilient in the first half of 2022 (minus 13 per cent year to date), especially compared to global equities (MSCI ACWI Index: minus 21 per cent YTD). Moving into the second half of 2022, we remain optimistic about Asean equities and believe there is a place for them in your portfolio.
Despite a slow start, many Asean countries now sport vaccination rates above the global average. As a result, interest in tourism has spiked significantly and the region is steadily reopening to international travel. This improvement in tourism outlook – helped by a low base – will be a strong tailwind to Asean’s growth momentum in 2H22. In 2019 before Covid-19 hit, tourism accounted for 12 per cent of the region’s GDP and 13 per cent of total employment. The improving macro backdrop should also support equity prices, which have historically tracked the region’s economic momentum closely.
Due to the improving macro outlook, we expect Asean equity earnings to rebound by about 6 to 8 per cent in 2022, and by 10 to 15 per cent in 2023, which is slightly above its historical average positive EPS (earnings per share) growth of 10 per cent. Despite the expected headwinds for global earnings due to rising costs and moderating growth, we believe these factors are supportive of Asean equity earnings:
- Asean equities’ pro-cyclical tilt
- Improving situation in China
- Sustainable earnings rebound from historical lows
First, Asean equities have heavy allocations into cyclical sectors (financials, industrials) which are highly levered to economic growth. Thus, with our view of an improving macro backdrop, we expect greater earnings upside given Asean equities’ pro-cyclical tilt. We expect the Asean financials sector to form the backbone of the region’s EPS strength, with the major banks in Singapore and Indonesia generally expected to see robust double-digit EPS growth over the next two years.
Second, we expect a positive turnaround for China, which should then lead to positive spillover effects on the Asean economy and equities. For instance, looser pandemic restrictions could result in greater tourism revenue from Chinese tourists (who make up about 20 per cent of Asean tourist arrivals), and help to mitigate ongoing supply-chain bottlenecks. Furthermore, as China is Asean’s largest trading partner, a turnaround in China’s economy could also result in stronger demand for Asean exports.
Third, with these earnings tailwinds in mind, we believe it may be time for a stronger recovery in Asean equity earnings. 2020 saw their largest earnings decline in history (minus 34 per cent), with EPS collapsing to 10-year lows across many Asean equity indices. The subsequent earnings rebound in 2021 was relatively lacklustre, and the region is one of a few where EPS did not fully recover between 2019 and 2021. We believe this sluggish recovery was due to pandemic uncertainties, but as these uncertainties gradually fade, we expect a sustainable rebound in earnings over the next few years.
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On top of the improving outlook for Asean equities, we believe the inclusion of Asean equities in your portfolio has several benefits. Asean equities can serve as an effective diversification play within a global portfolio as their returns have a relatively low correlation and beta, and historically lower volatility, compared to US, China, and LatAm equity returns. Hence, we believe that Asean equities can serve not only as a near-term reopening play, but also as a key part of your portfolio.
While there are many reasons to consider investing in Asean equities, investors should remain mindful of the rising rates and elevated inflation environment. Nonetheless, we believe the pace of tightening by the region’s central banks will unlikely be as urgent as the US, especially as the Asean economic recovery remains fragile, and CPI inflation in the Asean-5 (Singapore, Malaysia, Thailand, Indonesia, Philippines) remains far from record highs, unlike in the US. As a result, while Asean inflation and monetary policy will be a key risk for equity performance, we believe that their effects will not be as drastic as what we have witnessed in the US.
On the whole, we remain optimistic on Asean equities as the region could potentially benefit from a regional economic reopening and a possible turnaround in China. There is room for a stronger earnings rebound in the years ahead, which coupled with undemanding valuations, makes multiples look even more palatable on a longer-term horizon. Asean equities can help to diversify your portfolio, perhaps as part of your overall allocation into Asian equities.
In general, we recommend a diversified approach to your investments. Both exchange-traded funds and unit trusts enable you to invest without outsized exposures to any single company. For Asean ETFs, we like the Premia Dow Jones Emerging ASEAN Titans 100 ETF, due to its low expense ratio and low tracking difference compared to peers. As for unit trusts, we prefer the Principal ASEAN Dynamic Fund Class SGD, due to its consistently strong performance and good downside risk management relative to peers.
The writer is a research analyst of the research & portfolio management team at FSMOne.com. FSMOne.com is the business-to-consumer (B2C) division of iFAST Financial Pte Ltd., the Singapore subsidiary of SGX Mainboard-listed iFAST Corporation Ltd.)
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