Could ASEAN stocks outperform for a fifth year in 2012?

ASEAN economies are expected to grow between 3% and 5% this year – will their sharemarkets echo this?

Many of Asia’s biggest stock markets had a poor 2011. That helped to make the steady performance of the four emerging ASEAN countries in the MSCI Asia ex-Japan Index even more remarkable.

Stock benchmarks in the Philippines, Indonesia and Malaysia rose 4.1%. 3.2% and 0.8% respectively last year while Thailand’s only edged down 0.8%, even though the country suffered its worst flooding in nearly 70 years. These four countries plus Brunei, Cambodia, Laos, Myanmar, Singapore and Vietnam comprise the 10 members of the Association of Southeast Asian Nations.

Singapore, which is classed as a developed market, is the only other ASEAN member in the regional index. Even though Singapore’s Straits Times Index sagged 17% last year, the performance of the island’s four emerging neighbours meant that ASEAN markets last year outperformed the MSCI Asia ex-Japan Index for the fourth straight year.

Like Singapore’s, the other five markets in the MSCI Asia ex-Japan Index struggled last year. Equity benchmarks in India, China, Taiwan, Hong Kong and Korea slumped 25%, 22%, 21%, 20% and 11% respectively in 2011.

Singapore and the five non-ASEAN stock markets drooped as authorities battled inflation by tightening monetary policy and their major export markets of Europe and the US struggled under sovereign debt concerns. These six countries comprised 87% of the MSCI Asia ex-Japan Index on 31 December 2011. That explains why over 2011 the Asia benchmark fell 17% in US dollars and the same amount in Australian currency.

The Philippines, Indonesia, Malaysia and Thailand fared better because reforms enacted after the Asia crisis of 1997-98 have stabilised their economies, inflation is largely under control, these economies are more driven by domestic demand, and authorities are insulating their countries from global concerns. Central banks in Indonesia and Thailand have cut interest rates in recent months and governments in all four capitals are implementing fiscal stimulus. Thanks to these measures, ASEAN economies are expected to grow between 3% and 5% in 2012.

Evidence of the improved economic fundamentals of these four ASEAN economies include how government and household debt are low relative to GDP. Indonesia, for instance, has reduced government debt from 47% of GDP in 2005 to 26.1% by June last year, while household debt in Thailand is only at 27% of GDP.

As trade among ASEAN nations sets fresh records, these four countries are running current-account surpluses – Malaysia’s is 12.3% of GDP – and have doubled, tripled or quadrupled their forex reserves in the past five years. The Philippines’ forex reserves, for example, climbed from US$19 billion in 2005 to US$75 billion by September last year.

Importantly for stock investors, corporate balance sheets are just as healthy, earnings are growing and valuations are attractive on these ASEAN markets.

For a fifth year?
The Philippines hosted Asia’s strongest-performing bourse in 2011 after Fitch, Moody’s and S&P lifted their credit ratings or outlooks closer to investment grade due to the country’s stable economy and improved government finances. Inflation ended the year below 5% while the economy is expanding at a 3% clip with spending stimulus to come.

Indonesian stocks came second for the year, after being Asia’s best performers in 2010 and 2009. During the past 12 months, Indonesia regained its investment-grade credit rating after a 14-year lapse, the central bank cut rates twice to support growth and a law was passed that allows the government to acquire the land needed to create the infrastructure the country lacks.

Malaysian stocks posted their third straight year of gains, the first time they have done so since 1993, thanks to the defensive nature of the country’s largest stocks. The government is preparing fiscal stimulus to protect economic growth running at a 6% annual pace while inflation remains under control at just over 3%.

Thailand stocks withstood the floods that killed more than 600 people and wrought more than US$10 billion in damages. Rate cuts, government financial aid and rebuilding are expected to help the economy recover by the second quarter of this year and grow about 5% in 2012.

While challenges lurk, emerging ASEAN markets could easily outperform the regional benchmark for a fifth consecutive year in 2012, while again offering positive returns.

Financial information comes from JPMorgan and Bloomberg unless otherwise stated.
1 Bank of America Merrill Lynch. “ASEAN 2012: Buy superior & quality growth.” 9 December 2011
2 Morgan Stanley. “ASEAN Economics. Navigating the 2012 global slowdown.” November 2011
3 Bank of America Merrill Lynch. Op cit.

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