Why are Southeast Asian stocks outperforming?

Since the end of June, markets in Southeast Asia including the Philippines have outperformed the United States. This happened as growing expectations that the Fed would pivot caused the dollar to weaken and Southeast Asian currencies to strengthen. Note that the peso has appreciated by 4.5 percent since the end of June.

Aside from the diminishing risk of forex losses, other compelling reasons why foreign investors started increasing their exposure to Southeast Asian stocks include the region’s stronger economic growth outlook.

Gross domestic product (GDP) growth of most Southeast Asian countries is expected to be faster than that of the United States this year and next year, with the Philippines projected to deliver the second fastest growth of 5.8 percent this year and 6 percent next year.

The debt levels and budget deficits of countries in Southeast Asia are also much lower than that of the United States making them less risky.

For example, in 2023, the US’ debt-to-GDP ratio was 123 percent. This was more than double the debt to GDP ratios of Southeast Asian countries, which ranged from 37 percent to 62 percent.

A better position

While the Philippines’ budget deficit of 6 percent in 2023 was at par with that of the United States, its economic growth was faster.

Growth is also expected to stay fast, putting the Philippines in a better position to pay down its debts despite its large deficit.

Valuations of Southeast Asian stocks are also very cheap. Southeast Asian markets are trading significantly below their 10-year historical average P/Es. In fact, despite its strong performance since the start of the third quarter, the PSEi index is still trading at only 11.7X P/E which is 1.6 standard deviations below its historical average P/E multiple of 15.7X.

In contrast, the US’ S&P 500 index is trading at 21.6X P/E, which is 1.7 standard deviations above its 10-year historical average P/E of 18.2X.

Other factors going for the Philippines specifically is its favorable demographics. The median age of Filipinos is very low at 25.7 years, while the population is still growing by around 0.8 percent annually. In fact, these numbers are better compared to that of most Southeast Asian countries.

The Philippines is also more resilient to a potential slowdown in the global economy. While most of our Southeast Asian neighbors are export dependent, the Philippines is a net importer as we are a domestically driven economy. Household consumption accounts for around 73 percent of our GDP.

The main risk facing investors of Philippine stocks is a possible contagion in case the United States suffers from a recession and a bear market. The Philippines’ historical track record has not been good as it has always suffered from a contagion.

Hopefully though, any potential decline will be shallower, and recovery faster given the favorable qualities of the Philippine economy and the very cheap valuations of local stocks.