Southeast Asia faces a perfect storm

Rising interest rates, slowing economic growth, political uncertainty and a stronger US dollar – any one

of these factors could spell trouble for the small, volatile markets of southeast Asia. But in 2014, the

region looks set for the perfect storm of all four.

The contrast to a year ago is stark. Back then the three “TIPs” markets – Thailand, Indonesia and the

Philippines – were riding high as investors snapped up stocks in these consumer-driven economies.

Unlike the export-heavy countries further north, southeast Asia was seen as a relative haven in times

of moribund global growth.

That euphoria hit a brick wall in May with the first mention by Ben Bernanke, Federal Reserve

chairman, of the possible scaling back, or tapering, of its asset purchases this year. On May 21, the

day before Mr Bernanke spoke, the Philippine stock index closed at a record high, while Thailand hit a

20-year pinnacle. Indonesia had reached an all-time high a day earlier.

Within weeks, the three fell into bear market territory, and none has fully recovered since the region’s

frailties were exposed during the summer “taper tantrum” that hit developing markets globally.

Soek Ching Kum, head of southeast Asia research at Credit Suisse Private Banking, says the region’s

still-high valuations are likely to prove a drag once tapering finally begins.

“We do expect southeast Asian markets to do less well than north Asia, at least for the first half of

next year. Big global factors will overshadow the local factors to a large extent,” says Ms Kum.

Despite the falls of the past six months, Indonesia, Thailand and the Philippines continue to trade at a

premium to the MSCI Asia ex-Japan index. The Philippines index, for example, has dropped from a

forward price to earnings ratio of 22 times in May to 16.8 times estimated full-year 2013 earnings. Yet

that compares with a regional average of 12.4 times forward earnings and a historical average of

about 14 times.

Although Ms Kum, like many analysts, expects the fallout from the onset of tapering to be more

modest than over the summer, each country also faces increasing local headwinds.

For Thailand and Indonesia, politics poses a threat. Goldman Sachs, Nomura and Bank of America Merrill

Lynch are among those recommending underweight positions in both countries.

Recent unrest in the Thai capital has spilled into the equity market. Foreigners took $325m out of the

Thai market last week alone, helping pull the index down to its lowest level since September and

solidly into negative territory for the year.

Politics aside, the Thai economy already faces growing problems. Household debt has soared to about

80 per cent of gross domestic product since 2008, among the highest in Asia. Meanwhile, wage

growth has stalled as government programmes to boost consumption come to an end.

Daiwa Securities recently cut its Thai growth estimate for this year from 3.7 per cent to 2.9 per cent,

and shaved 3 per cent off expected full-year earnings.

In Indonesia, investors are weighing potential risks from the presidential election to be held before

July, as well as a stubborn deficit – the main source of concern earlier this year.

Hozefa Topiwalla, head of Asean research at Morgan Stanley, says Indonesia’s equity market

correction has merely priced in the “new normal” of slower growth, and that the index is closer to fair

value.

Even the Philippines, Asia’s fastest-growing economy in the second quarter, has its worries. The

devastating impact of Typhoon Haiyan last month is expected to dent the economy in the fourth

quarter and the first half of 2014, and to fuel inflation due to reduced agricultural output.

HSBC expects growth to drop from 6.8 per cent this year to 5.8 per cent next , while consensus

among analysts points to a halving of earnings growth in 2014.

The rising US dollar – historically a negative for emerging markets globally – is also likely to have an

impact. Over the past month, the Thai baht, the Philippine peso and Indonesia’s rupiah have been

the three worst performing currencies in emerging Asia.

However, some investors remain upbeat. Wing Kin Chow, portfolio manager at Eastspring

Investments, says valuations are beginning to “look interesting”, and plans to use any further pullback

as an opportunity to buy. “Our view is that, long term, these markets remain some of the strongest in the region,” says Mr Chow. “Following the correction, markets have already discounted much of the bad news.”