Southeast Asian Markets Attract Global Capital Attention Amid Upcoming Fed Rate Cuts
As the Federal Reserve nears a new cycle of interest rate cuts, global capital is surging into Southeast Asian markets in search of fresh growth opportunities. This influx of investment has led to a significant uptick in foreign inflows, marking a fifth consecutive week of gains, according to Bloomberg. Concurrently, the MSCI Asean Index has reached its highest trading levels since April 2022.
From August to the present, notable rises are observed in the stock indices of ASEAN countries: Thailand's SET Index increased by 7.16%, Indonesia's Composite Index by 6.96%, and the Manila Composite Index by 4.92%, in stark contrast to the modest 0.58% rise in the $S&P 500 Index (.SPX.US)$. Meanwhile, so far this year, the Malaysian $FTSE Bursa Malaysia KLCI Index (.KLSE.MY)$ index has risen over 12%, while the Singapore $FTSE Singapore Straits Time Index (.STI.SG)$ index has seen a near 10% increase. The performance of related country ETFs is illustrated in the following chart:
Why Are Southeast Asian Stock Markets Favored by Foreign Investors?
Regional Economies Exhibit Steady Growth and Resilience: Emerging economies, notably those in Southeast Asia, have become new engines of global economic growth. According to recent data, Southeast Asia's economies remained resilient and delivered credible economic performance in the second quarter 2024. All economies in the region experienced GDP growth, with Malaysia, the Philippines, Thailand, and Vietnam showing the most rapid yoy growth rates observed in the last four quarters.
Policy Catalysts: The integration of regional trade, government policies that encourage fiscal relaxation, and strategies to attract foreign investments play a pivotal role in attracting continuous foreign capital to the ASEAN region. Notable examples include Indonesia's fiscal easing initiatives and measures in Thailand and Malaysia that favor stock ownership.
Youthful Demographics and Robust Market Demand: Southeast Asia boasts a substantial population, which coupled with economic growth, establishes a solid foundation for its expansive market size.。
Moreover, relatively light positioning by foreign investors and attractive valuations are also key factors why foreign capital favors Southeast Asia.
These advantages have poised the region to leverage the global investors' pivot from major counterparts such as China. John Foo, founder of Valverde Investment Partners Pte, believes that ASEAN has been overlooked for an extended period and it’s time to pay attention.
Investors are beginning to wake up to the many alpha opportunities available, from the commodity companies in Indonesia to the stable REIT market in Singapore to the tech plays in Malaysia, and the export plays in Vietnam and numerous recovery plays in Thailand.
Analysts Bullish on ASEAN
Goldman Sachs has elevated Thailand's status to market weight from underweight this month, influenced by the introduction of the country's new state-controlled Vayupak Fund. The fund is expected to provide "both sentimental and liquidity support, attracting foreign capital back to the market."
Chun Hong Lee, a portfolio manager at Principal Asset Management Bhd., commented, "If interest rate cuts are here to stay and there's no recession, this rally can extend toward the end of 2025."
Nomura highlighted in its latest Asian market strategy report that with the Federal Reserve's anticipated rate cuts, now is the opportune moment to increase holdings in Southeast Asian stocks. The firm upgraded equities in both Indonesia and Malaysia, citing solid macroeconomic fundamentals.
Vivian Lin Thurston, a fund manager at William Blair Investment Management in Chicago, believes that Malaysia is looking more interesting than it has in a long time.
A couple of our EM strategies have started to invest in Malaysia in recent times in light of the country's economic improvement and growth of data centers. We hope to broaden the exposure to other strategies.
Meanwhile, HSBC observed that Indonesian stocks are now holding a larger share in the portfolios of Asian funds.
Potential Risks
Despite the favorable outlook for Southeast Asian stock markets, there are perspectives that suggest continued uncertainty in their future trajectory. Historically, during Federal Reserve rate-cutting cycles, the U.S. often experiences economic recessions, which could significantly impact Southeast Asian economies that heavily rely on external demand. Additionally, foreign investors engaging in ETF investments or stock trading in non-local currencies should still be mindful of exchange rate risks.
McKinsey maintains that the volatile global landscape continues to emit mixed signals, and various persistent challenges, such as geopolitical conflicts, may threaten Southeast Asia's growth momentum.
Nomura, optimistic about Malaysian and Indonesian stock markets, notes potential risks. For Malaysia, a cooling in AI investment themes could impact stocks related to data centers or AI.
In Indonesia, a concerning issue is the local listed companies' negative earnings growth in 2024, with a modest expected profit growth of only 7% in 2025. Additionally, the Indonesian parliament's move to amend the local election law has sparked widespread protests, posing a significant political risk, potentially the most substantial downside for the Indonesian stock market.
Source: Bloomberg, MSCI, McKinsey
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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