Hot money rotating out of China into Asean
Regulatory jitters concerning China are diverting some portfolio flows to Southeast Asia, bringing profit opportunities even to out-of-favor markets like the Philippines and Malaysia, based on a research from J.P. Morgan.
In an interview with the Inquirer, J.P. Morgan South Asia and Emerging Markets (EM) strategist Rajiv Batra also said that investors were now less concerned about equities valuation or the emergence of new COVID-19 variants.
“They’re more concerned about the growth rate that they are tracking and how the vaccination rates are moving. Based on that, we think that the growth estimates are going to be revised higher if mobility resumes, led by easing restrictions, retail sales gaining momentum, travel and tourism picking up,” Batra said. “Global growth rate going above trend will be another key factor, which will support exports and industrial production.”
In a research note issued earlier this month, J.P. Morgan noted that all Association of Southeast Asian Nation (Asean) countries except Vietnam recorded net foreign equity inflows in August. There was net foreign buying worth $311 million in Indonesia, $251 million in Malaysia, $175 million in Thailand and $33 million in the Philippines, while Vietnam recorded an outflow of $277 million.
In the case of the Philippines, August marked the first time in 21 consecutive months that foreigners had turned into net buyers.
Before August, the Asean as a whole had seen collective net equity outflows for six consecutive months, while foreign ownership was also at record-low levels.
“The rotation out of China is happening more because of the regulatory uncertainty regarding the internet and the e-commerce sectors. Now we know China is a part of the EM, contributing almost 40 percent of the [MSCI EM] index. So, if the money comes out of China, it will be beneficial for everyone in the region because it is 40 percent versus the rest (60 percent),” Batra said.
During the pandemic, Batra said market consensus had turned “underweight” from either “neutral” or “overweight” on the Philippines, which means they are investing less than the allocation prescribed by the MSCI EM index. This is the opposite of “overweight.”
Market consensus turned “underweight” as investors became “circumspect” about the country’s growth recovery, and how it would come out of the pandemic, Batra said.
A year into the pandemic, the government reimposed tough lockdown restrictions earlier this year as daily COVID-19 infections hit new highs.
“Thankfully, they have done quite well in terms of a higher vaccination rate and are reacting well to queries from investor in terms of a better healthcare strategy and policy, and better vaccination rates. But there is still that worry about the recovery and also the size of the market – because Philippines is the smallest market in terms of volume and liquidity among all Asean countries,” he said.
“But if the situation and recovery were to have an upward trajectory, I am confident that the Philippines will again be in the investors’ favor, and be a favored market for foreign investors,” he said.
In the case of Malaysia, he said market consensus had been underweight on this market for the last four or five years due to lack of long-term catalyst in terms of reforms, the downturn in corporate earnings in the past five years alongside political uncertainties.
J.P. Morgan has an “overweight” rating on Thailand, Indonesia, Singapore and Vietnam.
Overall, Batra said Asean policymakers were trying their best to navigate the challenging times, and using different public health strategy to control infection with lesser impact on the economic growth of the country.
For investors moving some funds out of China, Batra said the key considerations for alternative destinations were: trajectory of economic recovery, corporate earnings growth prospects, vaccination rate and stimulus from policy-makers. Consensus positioning is likewise seen as a factor as investors want to know how crowded a particular market is.
The regulatory regime for new economy sectors is also seen as a potential driver. “So in case of Asean, or any other country, if the new economy sectors are not facing any headwinds from the policy side, they will be very happy to shift money from Chinese internet or the other sectors with high policy risks,” Batra said.
Among other risks, J.P. Morgan sees the US Federal Reserve announcing a tapering of monetary stimulus by November or December. However, it does not expect a repeat of the “taper tantrum” that battered the region in 2013.
Besides better macro fundamentals compared to 2013, the J.P. Morgan research noted that the region was better insulated given global investors’ meager equity allocation for Asean and the substantially larger foreign reserves of various economies in the region that can cushion against an exodus of hot money.
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