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Alan Tan Portfolio Manager for the Milltrust ASEAN (UCITS) Fund, and Portfolio Manager – Head of ASEAN Equities at Lion Global Investors, shares his outlook for the ASEAN markets and the key reasons to be invested in South East Asia:

Key drivers.

  • Supportive demographics
  • Growing middle class

ASEAN Class Growth

  • Foreign inflows back in ASEAN

Screen Shot 2016-06-23 at 14.27.55

  • Rising labour force due to young population

ASEAN Labour Force

  • Attractive valuations

ASEAN Valuations

 

Key risk factors.

  • More recently, the ASEAN market turned bearish as earnings growths for 2016 was revised downwards; post the release of corporates’ first quarter earnings. Overall, 2016 consensus earnings were cut by between 1 to 5% for the ASEAN markets. As of now, the consensus earnings growth for ASEAN is 3.8% for 2016.  However, there are signs that earnings revision momentum is bottoming, with the US showing positive revisions. Equities are more attractive relative to bonds as the spread between dividend yield and bond yield remains wide relative to its historical average.
  • In terms of risks, a stronger US economy could bring forward US rate hike expectation and revive US dollar strength, potentially causing another episode of weak commodity prices, RMB devaluation and rising default fears. Market volatility may also increase as the market price in a potential Brexit in June 2016 and a Trump victory in November 2016 US presidential elections.
  • The portfolio is positioned defensively in the meantime, with a biggest absolute position in Singapore, focusing on high yielding names. We will take this opportunity to accumulate on weakness.

More specifically, as an update for each country:

  • Thailand. Thailand posted a first quarter GDP growth of 3.2%, the highest in 3 years, with growth primarily driven by fiscal stimulus and tourism-related incomes while domestic demand remained lackluster. Trade surplus contracted in April 2016, as both exports and imports narrowed by 8% and 14.9% respectively. Inflation in May 2016 spiked up to 0.46% as the recent drought had impacted the supply of fresh food. Consumer plays had outperformed in May 2016 on strong earnings.
  • Indonesia.  In Indonesia, April 2016 trade surplus expanded to USD 667 million from USD 508 million in March 2016 as imports declined by a larger margin of 14.6%yoy versus the drop in exports of 12.6%. The central bank kept rates unchanged as inflation remained manageable at 3.3% in May 2016. First quarter GDP growth came in at 4.9%, which surprised on the downside as growth momentum was weighed down by slower government spending. Materials declined the most as challenging industry environment impacted cement companies.
  • Singapore. The Singapore market weakened in May 2016 as concerns surrounding the impending US rate hike led to a weaker Sing dollar. Headline inflation had been in the negative territory for the 18th consecutive month and inflation in April 2016 stood at -0.5%yoy versus -1.0%yoy in March. Relaxation for motor vehicle financing was announced by the MAS, namely the easing of maximum loan-to-value ratios and loan tenure for motor vehicle loans. The equities market generally declined last month, with consumer sectors declining the most. The Singapore market had been trading at a huge discount to historical valuations and the rally in recent months posed a relief to investors. with the economy only registering a growth of 1.8% in the first quarter of 2016.
  • Malaysia.  Malaysian equities underperformed in May 2016. The sell down was induced by the reduction in country weighting as part of the MSCI rebalancing. In addition, the Ringgit depreciation further and this amplified the market’s weakness. The country also reported its lowest GDP growth of 4.2% for the first quarter of 2016. Inflation had dipped to 2.1% in April 2016 while the Purchasing Manager’s Index (PMI) fell to 47.1 as operating conditions worsened in the manufacturing sector. Energy and consumer discretionary sector led the decline last month.
  • Philippines.  Rodrigo Duterte became the 16th President of Philippines, succeeding Benigno Aquino who had spent six years in office. Duterte named members of his cabinet soon after and he reiterated his plans to streamline bureaucracy and reduce crime. Trade deficit widened to USD 1.7 billion in March 2016 as exports were down 15.5%yoy (year-on- year) while imports rose 11.7%yoy. Key policy rates were kept unchanged as inflation outlook remained manageable and external market conditions appeared soft. Sector wise, telecommunication services delivered the best performance while consumer staples lagged the market.

Forecasted return for each investment over the next 12 months (in USD).  

Upside for Singapore (10.99%), Malaysia (1.53%), Indonesia (5.93%), Thailand (4%) and Philippines (4.37%)

Potential downside over the next 12 months (in USD).  

Downside for Singapore (-3.57%), Malaysia (-7.65%), Indonesia (-6.89%), Thailand (-14.04%) and Philippines (-19.31%)

June 2016