What next for Southeast Asia equities?

Asian equities in 2013 were dominated by the bull markets in Japan and Southeast Asia, yen depreciation and consequent foreign selling in South Korea and Taiwan, political and inflation woes in India, a cyclical uptick in China and a non index fairy tale in Vietnam.

By (MACRO IDEAS)

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Published: Mon 25 Mar 2013, 10:22 PM

Last updated: Fri 3 Apr 2015, 4:37 AM

In Hong Kong and Singapore, weaker exports and restrictions on property speculation have cast a spell on the Hang Seng and Straits Times indices. Malaysia and Pakistan await critical elections.

The most amazing aspect of Asian equities is the spectrum of valuation indices in the regional stock exchanges. So South Korea trades at eight times forward earnings while the Philippines, despite its undeniable macro and sovereign credit momentum, trades at an incredible 20 times earnings. The Dow Jones has scaled its 2007 highs but Hong Kong is 10,000 Hang Seng points (one third) below its 2007 high now that central bank money printing created epic bull markets in the former British Crown Colony/now China’s SAR.

In a macro sense, accelerating growth in China and the US is bullish for Asian equities, though fiscal drag in Washington, the Politburo’s crackdown on property speculation and Italy/Cyprus event risk on European growth all have the potential to cash dark (if fleeting) clouds on the sunshine scenario. Central bank policies will be no impediment to Asian bull markets. The Kuroda BoJ will embrace a two per cent inflation target and the Bernanke Fed will unquestionably not take El Toro’s punch bowl away. Asian earnings/margins, after two mediocre years, have compelling uptick potential.

The DMK’s threat to pull out of the ruling coalition on Sri Lanka related issues just reinforces my conviction that Sensex valuations (or reform momentum) cannot rerate at a time when India faces ten state elections and a general election. Asia’s largest current account deficit, fiscal indiscipline, a downgraded five per cent GDP growth, a iffy rupee and optimistic earnings prediction made me Sensex bearish 1200 points or two months ago still sceptical on Dalal Street.

Thailand (1.6 per cent of the Morgan Stanley EM index but a 38 per cent dollar return sine November 2011, when I flagged the Siam macro trade idea in successive columns just after the election/floods) seems the best positioned value market in Southeast Asia. Five per cent GDP growth, an infrastructure spending bonanza, 18 per cent expected earnings growth, compelling valuations at 13 times forward earnings and a 3.4 per cent dividend yield on the SET index, a political rapprochement among rival Thai elites all suggest the Thailand bull market is secular, not cyclical. Can the SET index fall to 1450 amid a global market hit or even Thai specific event risks? Yes. Yet if there was a buy in dip market in Asia, Thailand is it.

The Strait Times index in Singapore could have another 200 point downside and the Sing dollar has lost its strength momentum. Singapore trades at 14 times earnings, EPS growth, is mediocre at five-seven per cent in 2013, the local bank shares seem overvalued. However, somewhere in the 3000 STI level, Singapore could well prove a less inexpensive proxy Asean market. South Korea, thanks to the yen/Nikkei, offers far more compelling deep value global brand companies. In any case, South Korean EPS growth will easily be triple Singapore.

Indonesia is one of the strongest domestic growth themes in Asian, with six per cent GDP growth and 15-20 per cent earnings growth. Yet Jakarta is dangerous as the overheating/inflation/current account deficit will trigger a rupiah depreciation even as the political scrum to succeed President Yudhoyono heats up. I will only invest in Malaysia if PM Najib Razak and the ruling Barisan coalition, whose economic transformation plan is key to the Kuala Lampur Borsa, wins the next election.


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