Both international and domestic investors in Southeast Asia’s equities are “quite downbeat” on the region’s prospects, Nomura said in a recent note.
That was after meeting with more than 50 investors based in Asia, including Tokyo, and domestic investors in Kuala Lumpur, Jakarta, Bangkok and Manila, about ASEAN, or Association of Southeast Asian Nations, it said.
“We sense interest in ASEAN equities has clearly picked up over the last few months; however there appears widespread caution towards emerging market/ASEAN equities, in particular Indonesia and Philippines given their – now well flagged – current account deficits,” Nomura said.
Even though the recent selloff in tech stocks has helped Southeast Asian equities outperform Asia ex-Japan as a whole, “investors still appear unwilling to consider raising their ASEAN exposures,” it said.
Although it pointed to some thematic interest in possible relocation of manufacturing from China and toward Southeast Asia, Nomura said most investors said, and the investment bank agreed, that the equity impact would be limited in the short term.
Nomura pointed to three global macro variables as key to the Southeast Asian markets’ outlook: Oil prices, U.S. 10-year yields and the U.S. dollar.
“These three variables have been grinding higher over the last few months – and thus have been a major headwind for ASEAN equities (especially Indonesia and Philippines),” it said. But it added that positioning in all three appeared “quite stretched.”
On Indonesia, the consensus seems too negative, Nomura said, noting all eyes are on the Indonesian rupiah for signs it’s stabilizing before turning more positive on the country’s equities. It also pointed to some hesitation ahead of the country’s presidential elections next year.
But Nomura added, “We believe any stabilisation in the Indonesian rupiah could see a rally in equities, given that equity valuations have de-rated significantly, earnings growth (despite some cuts ahead) will still likely be ahead of regional growth estimates in 2019E.”
The dollar was fetching 14,950 Indonesian rupiah on Friday, remaining near levels last seen during the Asian Financial Crisis in the late 1990s, compared with levels around 13,510 rupiah at the start of the year.
Nomura said it was sticking with its Overweight call on Indonesian equities within a Southeast Asian context.
In the Philippines, investors appeared underweight, Nomura said, noting inflation was being watched for signs of stabilization.
“Most agreed with us that Indonesia appears much better positioned than the Philippines, with the former still having some ammunition in the form of fiscal room, and still moderate inflation (although artificially suppressed by subsidies),” Nomura said.
“Interestingly, like Indonesia, domestic investors we met (albeit small sample set) also seemed quite downbeat on the prospects for Philippines equities,” it added.
Thailand appeared to be a consensus overweight for the region’s equity investors, despite the region’s worst net foreign equity outflows so far this year, Nomura said, noting investors were nearly universally seeking the reasoning for the investment bank’s Underweight call on the market.
Nomura pointed to a likely scenario of a weak government after elections expected next year, which could be negative for equities, and to extended valuations which are nearly 8 percent ahead of their Global Financial Crisis average, while most Southeast Asian markets are trading below or in line with historical averages.
In Singapore, Nomura said it saw some pushback on its downgrade of the market to Underweight, with investors saying they believe the market’s valuations were attractive.
But Nomura said that while 2018 was seeing strong earnings growth, that could slow next year amid downside risks from slower trade growth, property tightening measures and weaker growth in China.
For Malaysia, Nomura said it saw little interest, with investors citing the challenge of stock-picking.