Asean equities seen to surprise global investors
American investment banking giant JP Morgan sees Southeast Asia yielding positive surprises for global equity investors this year despite another challenging year for emerging markets.
In a recent interview with Inquirer, Hong Kong-based JP Morgan managing director and chief equity strategist for Asia and emerging markets Adrian Mowat said the key markets within the Association of Southeast Asian Nations (Asean) bloc were proving to be very “resilient,” adding that their currencies had already adjusted to recent global shocks.
“I think these equities markets are going to surprise people in 2016,” Mowat predicted. “The contrarian call is to be optimistic on the Asean region, with more stable currencies than we can fear and equities markets that can give pleasant return.”
Mowat explained that Asean had some of the world’s strongest economies globally in terms of the underlying fundamentals—with good growth rates and decent balance of payments. At the same time, he said that investor positioning in emerging markets—including Asean—was very “underweight” relative to benchmark indices. As such, he said he believed that the region was actually less vulnerable to capital flows than people fear.
“I actually think that US equities going nowhere may be good for capital flows as people look for alternative place to make money. We’ve had record outflows last year so positioning is very bearish. Flows will follow fundamentals, right? And fundamentals here are pretty decent,” he added.
In the case of the Philippines, Mowat said the local stock market could deliver a corporate earnings growth rate of around 12 percent this year, which he noted was “a very high number on a global basis.”
However, he said JP Morgan had a “neutral” recommendation on Philippine equities this year. This means that it was neither calling for an increase (overweight) or decrease (underweight) in exposure relative to the stocks barometer.
For many years, JP Morgan had an “overweight” recommendation on the local market.
“It’s the uncertainty around the election, less so on valuations because valuations have corrected,” Mowat explained.
Since closing at a peak of 8,127 in April 2015, the Philippine Stock Exchange index (PSEi) has pulled back by 1,362 points or 16.7 percent to close at 6,765.13 last Friday.
“With the Philippines, clients are comfortable with the economy,” said Mowat. “Clients like the long-term story of the Philippines but they would like to wait and see how the presidential election evolves.”
“You’ve got a four-way race now and so it’s very unclear who the next president is going to be and at the moment it’s unclear really what the macroeconomic policies are of the presidential candidates,” he said.
Based on the latest survey, Sen. Grace Poe is leading the presidential race, followed by Vice President Jejomar Binay, Davao City Mayor Rodrigo Duterte and former Interior Government Secretary Mar Roxas, who was endorsed by President Aquino as his preferred successor.
“To be fair, Philippines equities have done pretty well in the last decade or so and they have come off a bit and volumes have gone down, but it’s a little bit early to conclude it’s [heading to] a bear market,” Mowat said. “We have a record turnout of clients and clients are looking at stocks, at valuations. There’s a lot of interest to add position on the Philippines.”
JP Morgan’s projected earnings growth of 12 percent for the Philippines this year is higher than the 5 percent for Indonesia and 6 percent for Thailand while Malaysia’s corporate earnings are seen to contract. These four are among the biggest emerging markets within the Asean, which formally created in end-2015 the Asean Economic Community (AEC), a single market and production base that allows the free flow of goods, services, investments and skilled labor, and the freer movement of capital.
Within Asean, JP Morgan has an overweight recommendation on Indonesia, seen as the “best story” for now especially as the Indonesian central bank has started cutting interest rates.
In the case of Malaysia, Mowat said the currency had adjusted and fiscal position was good and current account remained in surplus despite the decline in oil price.
For China, Mowat said that while it was right for people to be worried about the macroeconomic situation, he would not be overly concerned. “We do have a story of reasonably robust Chinese consumer but a very weak industrial sector,” he said.
JP Morgan sees another half a trillion dollars flowing out of China this year, which would likely keep the renminbi under pressure. The currency is projected to depreciate further to 6.9:$1, which Mowat noted was “pretty modest.”
