Southeast Asian shares are expected to have a better year after a tough 2018, Nomura said, but said it preferred domestic demand stories and was underweighting external-demand themes.
Over the next three-to-six months, China’s growth is expected to deteriorate, before stimulus kicks in for the second half, and the electronics and exports cycle was likely to get worse before getting better, the investment bank said in a note on Wednesday.
“Domestic demand stories should still be better positioned versus external demand stories such as Malaysia, Thailand or Singapore, as global growth is set to slow down. Thus, our clear preference is to stay at home, rather than venture out in the open where significant risks lurk,” Nomura said.
It said it preferred markets where valuations can be justified by strong earnings growth prospects, the local currency has already taken a hit, suggesting a better risk-reward and there’s less exposure to China and trade, Nomura said, noting that the Philippines and Indonesia fit those bills.
It upgraded the Philippines to Overweight from Neutral, saying inflation has likely peaked, earnings revisions are stabilizing and valuations are supportive.
Within the country, Nomura said it liked banks and property, where earnings growth was likely to be stronger, and it also pointed to consumption stocks.
Nomura downgraded Malaysia to Underweight on poor macro- and micro-economic fundamentals, the lack of major expansionary reforms and poor earnings growth prospects amid higher valuations.
“With the new government more than six months in power already, while there have been efforts to fix fiscal leakages, there has not been a significant reform push which can potentially lead to expansionary economic activity,” Nomura said.
It added that another major issue for Malaysia was that oil prices have declined from levels above US$70 a barrel, which may make it difficult to “plug the fiscal gap,” after populist moves resulted in lower GST and reintroduced fuel subsidies.
Within Malaysia, it said it liked selected defensive banks as an indirect play on consumption, some value plays such as Gamuda and thematic plays, such as MAHB to play tourism and Vitrox on a strong earnings growth rate.
“We believe sustainable dividend yielding plays could be attractive as well in an environment where local rates are expected to be cut; and the government’s fiscal constraints may lead to higher dividends from government-linked companies,” the note said.
It remained Overweight on Indonesia on reasonably attractive valuations, rupiah stability, relatively strong macro-economics and low elections-related risks.
Underweight on Singapore
It stayed Underweight on Singapore on high exposure to trade and China, modest growth prospects amid a cooling property market and credit growth.
“The key levers for the Singapore market are banks, property stocks and to an extent telcos and the O&M sector. We find it hard to see what could really propel earnings for these sectors. Bank earnings have been strong so far this year driven by solid loan growth (which is now losing momentum due to a strong base effect),” the note said.
“From a macro standpoint, in our view, Singapore remains a leveraged play on global growth/trade and, with trade/growth set to slow next year, we believe a guarded stance is justified,” it added, noting it was the Southeast Asian market most exposed to Chinese growth.
It also kept Thailand at Underweight on an unfavorable risk-reward heading into elections and amid unappealing relative valuations and growth prospects.