Looking for gems in Asean’s multi-dimensional equities landscape

FRESH stimulus from Chinese policymakers, the start of a rate-reduction cycle by the US Federal Reserve and a decisive US election signal a change in market dynamics. As we enter this market environment, investors will be keen to explore emerging opportunities.

When debating the outcome of the US election from an Asian markets perspective, we always come back to fundamentals which drive longer-term returns more than temporary shifts in the markets. Therefore, our focus is on those sectors that offer the greatest organic growth opportunities, align with government policy initiatives and have the potential for increasing domestic demand.

Asia presents a vibrant landscape for equity investment as the outlook for earnings has improved recently across a broader range of markets and sectors. Supportive policy measures announced in China to stabilise the country’s economy, along with rate cuts by the Fed, offer a more favourable backdrop for regional markets as market breadth increases beyond a concentrated group of stocks.

Like the US, market leadership in Asia has become narrower since mid-2022. The market capitalisation-weighted index of MSCI AC Asia ex-Japan outperformed its equally weighted counterpart as investors focused on large-cap and tech-driven companies, while paying less attention to the other sizable parts of the investment universe.

However, we have seen this market-narrowing trend begin to reverse since September 2024 as the gap between cap-weighted and equal-weighted indexes has contracted. What this means is that market leadership has started to broaden. This opens up opportunities within Asia’s vibrant and diverse investment landscape.

Diverse and attractive investment landscape

In the last three months, the outlook for earnings has improved across a broader range of markets and sectors in the region. At the market level, several members of the Association of South-east Asian Nations (Asean), such as the Philippines, Singapore, Malaysia and Thailand, have received positive forward earnings revisions for the next 12. This is spread across a number of sectors.

Asean has long offered a diverse and attractive investment landscape. Younger demographics, a competitive labour force, rising urbanisation and a growing middle class in member countries such as Indonesia and the Philippines, underpin long-term structural demand trends which are expected to drive consumption upgrades and economic growth. However, the shorter-term prospects have been less convincing in recent years.

After a couple of lacklustre performance years, investor confidence towards Asean has significantly improved thanks to the Fed’s rate-cutting cycle, which is seen as positive for the region. A weakened US dollar alleviates pressure on local currencies and creates room for Asean countries’ own monetary easing. On top of that, China’s policy stimulus has further boosted market sentiment. More investment capital is expected to be directed to the Asean region as companies diversify their manufacturing base in China into the region.

The inflow of significant foreign direct investment (FDI) into Asean continues to be a multi-year trend, particularly in sectors such as manufacturing and technology. Companies are seeking to leverage lower-cost production bases and engage in major themes for the next decade, such as the electric vehicle supply chain, strategic materials and data centres.

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Supply chain shifts towards Asean markets, including Malaysia and Vietnam, are further bolstered by the region’s strategic location and infrastructure development, making it an attractive hub for global trade. Some garment manufacturers, toy makers, smartphone supply chain participants, automation manufacturing and technology solutions providers, and metal miners are among the noteworthy investment opportunities for FDI, while leading regional banks facilitate the flow of capital into and across Asean.

Furthermore, several Asean countries are experiencing a near-term demand recovery, particularly in the tourism sector. Thailand, for example, has seen a resurgence in tourism activity nearly back to pre-pandemic levels, which is expected to boost local businesses and stimulate economic growth.

Some potential investment opportunities include convenience chain stores and international medical services. Additionally, the easing of cost pressures in Asean countries makes them more competitive in the global market, thereby enhancing their attractiveness to investors.

As a whole, Asean equities are gaining traction from global investors, backed by a combination of a positive economic outlook, stable political outlook, and currency appreciation. Moreover, relative to other parts of the Asia, Asean equities remain attractively valued both on price-to-earnings as well as price-to-book value multiples at current levels, offering an interesting investment window for long-term investors.

While well-supported by structural growth prospects, the region remains an under-researched investment universe. Collectively, these factors create a compelling case for investment in Asean, with its mix of short-term opportunities and long-term growth prospects.

The writer is head of equities, Asia-Pacific, Fidelity International