Bizkado

A year after Asian stocks began to rise, investors should turn their attention to Southeast Asia, which lagged the wider rally and where exporters are set to thrive on growth in China and India.

Southeast Asian markets, suffering from export weakness and political risk, were overshadowed until late last year by China’s investment-fuelled growth, which boosted neighbours South Korea and Taiwan.
That rebound has now fed through to Southeast Asia, whose exporters look set to turn around quicker than economists had expected to drive economic growth in the region. One result — Malaysia’s surprise decision last week to raise its policy rate for the first time since 2006.
Investors will likely focus more on high returns and value with some tipping another strong year for Indonesian bonds and Thailand as offering the strongest earnings yield.

They will largely push aside serious political risks, though Indonesian stocks have been hurt recently by a parliament call for a criminal investigation of the two top reformers in southeast’s biggest economy.
Last Tuesday marked the one-year anniversary of the S&P 500’s 13-year closing low. Since then, the MSCI index of non-Japan Asia-Pacific stocks has risen 105%. In contrast, Malaysia’s main index has risen 57%, Thailand’s 75% and the Philippines’ 78%.

Indonesia was one of Asia’s star attractions last year, thanks to domestically driven growth, relatively low inflation and high bond yields that continue to attract foreign investors.
In addition, equity markets in Malaysia, the Philippines and Thailand have been outperforming non-Japan Asia this year based on value and may continue to do so as growth forecasts rise.

“Taiwan, China, Korea — these stories have been very well documented for more than a year and to some extent Southeast Asian markets have been neglected by investors,” said Tai Hui, an economist with Standard Chartered in Singapore.
“As markets calm down, investors will be looking for new trade ideas and the forgotten ones will be brought back.”
In Malaysia, Indonesia and Thailand, exports to China are running far above their long-term averages while shipments to the US and Europe are lagging, indicating a greater reliance on Chinese growth.

India’s trade with Southeast Asia is worth only a fifth of China’s, but Tai Hui believes it will catch up quickly because of its domestically-driven growth model.
Higher growth of course means interest rates later this year, but holding local currency bonds may continue to be lucrative, with currency strength and high coupon payments offsetting potential capital losses.
Take Indonesia for example. After equity-like returns of near 40% in US dollar terms on rupiah bonds in 2009, HSBC expects another 10%-13% this year, even factoring in a full percentage point of rate increases.

“Funds are beginning to gravitate towards (Asean) debt because of their strong fiscal positions relative to what they were like in the wake of the Asian financial crisis and prospects of currency gains,” said Desmond Soon, head of fixed income at DBS Asset Management in Singapore.
“These flows, barring a crisis of seismic positions, will gain,” said Soon.
Memories of central banks constantly behind the curve in dealing with double-digit inflation are one reason why investors have been slow to gain exposure to Southeast Asia.