Global Funds Flock to Southeast Asia as Investors Anticipate Fed Policy Shift
A significant driver of optimism for Southeast Asia is the relatively light exposure by foreign funds, which have the capacity to increase their investments. The MSCI Asean index currently trades at 13.6 times its projected earnings for the next twelve months
Southeast Asian equities have solidified their status as a preferred choice for investors anticipating a shift in the Federal Reserve's monetary policy. The region has captured the attention of global funds, with four of the top five performing equity benchmarks in Asia this month hailing from Southeast Asia, led by Thailand.
The surge in buying activity has propelled foreign investments to the brink of a fifth consecutive week of inflows, while the MSCI Asean Index is approaching its highest value since April 2022. Several factors are igniting optimism across markets from Indonesia to Malaysia, including relatively modest foreign investment levels, supportive domestic policies, and appealing valuations.
These elements have positioned the region to benefit as global investors pivot away from larger markets, such as China, especially amid the escalating economic challenges faced by the world's second-largest economy. "Asean has been overlooked for a long time," remarked John Foo, the of Valde Investment Pte. "Investors are starting to recognize the numerous alpha opportunities, from Indonesia's commodity firms to Singapore's stable REIT sector, as well as technology ventures in Malaysia and export businesses in Vietnam, alongside various recovery opportunities in Thailand."
Optimism for Southeast Asia
A significant driver of optimism for Southeast Asia is the relatively light exposure by foreign funds, which have the capacity to increase their investments. The MSCI Asean index currently trades at 13.6 times its projected earnings for the next twelve months, which is favorable compared to a 14-year average of 147 times.
Recent positive policy developments, including Indonesia's fiscal stimulus measures and initiatives in Thailand and Malaysia that promote stock ownership, are also contributing to this bullish sentiment, as noted by Tang, manager at Nikko Shenton Thrift Fund. He emphasized the strong performance of interest-sensitive and high-yield sectors, ranging from banks to property developers, as additional advantages for these countries.
These factors have enhanced the strength of Asean, allowing it to outperform the MSCI Asia Pacific Index by approximately 14 percentage points since early July. Brokerage firms are taking notice of these trends, with Goldman Sachs Group Inc. elevating Thailand's rating to market weight from underweight this month. The bank's strategist, Timothy Moe, anticipates that the newly established state-controlled Vayupak Fund will provide both sentimental and liquidity support, thereby attracting foreign investment back into the market.
Last month, Nomura Holdings Ltd. also upgraded stocks in Malaysia and Indonesia. "If interest rates are set to decline and there is no impending recession, this rally could continue into late 2025," stated Hong Lee, a portfolio manager at Principal Management Bhd.
The influx of global funds into Southeast Asian stocks highlights the region's growing appeal as a destination for investment. With its youthful demographics, low penetration rates for many goods and services, and potential to benefit from supply chain shifts, Southeast Asia remains a compelling long-term play for investors seeking diversification and growth opportunities.
Dr Ahmad Zaharuddin Sani