Nomura upgrades Indonesia, cuts Malaysia in Southeast Asian portfolio

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Nomura upgraded Indonesia to Overweight from Underweight in its Southeast Asian equity allocations, funded by cutting Malaysia to Neutral from Overweight.

On a three-to-six-month view, Nomura said it was raising its Indonesia allocation in part as equity valuations had turned attractive amid the “significant underperformance” of the market. Indonesia’s market trades at a forward price-to-earnings ratio of 13.8 times, 3 percent below its post-2010 average and below Southeast Asia’s 14.4 times, Nomura said in a note on Thursday.

The bank was also positive on Bank Indonesia’s interest rate hike, which should help stem the currency depreciation that has been a key concern for equity investors.

Malaysia

But it cut Malaysian equities to Neutral from Overweight in the wake of the shock election outcome which led to the first change in party control after 61 years.

“While the political and economic situation remains fluid after recent political changes, we believe a Neutral equities allocation is far more justified given near-term uncertainty and incrementally negative news flow on the removal of GST [goods and services tax] and re-introduction of fuel subsidies, which could be a drag on the fiscal situation, potentially GDP and earnings growth rates,” it said.

But Nomura added that it was “reluctant” to go Underweight on the market amid hopes the government will find policies to address fiscal concerns and potentially undertake reforms to improve investor sentiment.

Singapore

Among other regional markets, Nomura kept a tactical Overweight call on Singapore, pointing to its attractive relative valuations, with the market trading at 13.4 times price-to-earnings, with a two-year compound annual growth rate (CAGR) of around 11-12 percent.

It also pointed to Singapore’s positive earnings revision momentum, strong macro indicators such as credit growth and continued housing market recovery.

Nomura stayed Neutral on the Philippines, on expectations that higher interest rates could impact equity valuations due to rising inflationary pressures.

“We believe accelerating inflation (driven by a combination of higher oil prices, peso weakening and impact of TRAIN tax reforms – which our economics team believes is yet to fully play out) will likely continue to weigh on investor confidence as it undermines consumer confidence,” it said, noting that consensus earnings forecasts for the market have been cut.

Nomura remained Underweight on Thailand. It said it was “hard to justify” the market’s valuations at 15 times forward price-to-earnings, around 20 percent above the post-2010 average. Additionally, almost a third of the MSCI Thailand index was made up of energy and materials stocks, it noted, adding that with Brent oil trading well above Nomura’s full-year forecasts, it saw an “unfavorable risk-reward” for the sector.

Within its portfolio, Nomura added Sime Darby, Hanjaya Mandala Sampoerna, Bursa Malaysia, Bangkok Dusit Medical Services, SM Prime and Singapore Post. It removed Sunway Construction, CIMB Group, Indofood Sukses Makmur, Bangkok Chain Hospital, Beauty Community and DMCI Holdings.

Singapore’s UOB and DBS banks had the largest allocations in the Southeast Asia portfolio, at 10 percent and 8 percent respectively, followed by Genting Singapore at 5.9 percent, it said.