In our view, ASEAN equities present a compelling case given policymakers’ fiscal discipline and the imminent shift in monetary policy, which could in turn support the broadening of equity performance beyond the growth sectors toward core value sectors.
In brief
- Supported by growth sectors and financials, ASEAN equity performance has outpaced most of its regional peers this year, marking a sharp increase from 2023.
- ASEAN central banks are set to ease monetary policy rates in the coming months, in turn, providing a tailwind for both corporates and households.
- The higher payout ratio compared to other markets makes ASEAN equities an attractive option for those seeking income in the longer term.
- A constructive earnings backdrop, stable political environment, coupled with long-term positive drivers such as favorable demographics enhances the investment opportunity of ASEAN equities
The ASEAN tiger awakens
Given the limited weight of ASEAN (Association of Southeast Asian Nations) economies in major indices, with just a 5.6% weighting in the MSCI EM index, these markets tend to be overlooked in favor of the other heavyweights in the region, such as China, India and the North Asian economies. However, the ASEAN market has delivered returns of 19.0% year-to-date (YTD) in U.S. dollar terms1, a surge from last year’s 6.3%. While this is lower than India’s 25.8% returns, it is much higher than that of China and Korea, 6.4% and -6.6%, respectively. Notably, the attractive returns when couched against the backdrop of elevated interest rates implies further room for positive performance as ASEAN central banks are set to normalize policy rates.
In recent years, investors have stood on the sidelines when it comes to investing in ASEAN, in part, due to the dynamism of the political environment in some countries as they seek clarity around how policies will evolve. While the region notoriously faces episodes of political change more regularly than its developed market (DM) peers, the expectations of a major shake-up in the political landscape is limited in the near term. Moreover, earnings growth should be supported in the medium term by structural factors such as favorable demographics, ongoing shifts in supply chains and the abundance of natural resources, such as nickel, in some economies.
Decomposing ASEAN’s recent rise
Following a volatile first half of 2024, ASEAN equities surged at the onset of the second half, with the MSCI AC ASEAN index delivering an impressive 19.0% YTD return in U.S. dollar total return terms (Exhibit 1). Within ASEAN, there are variations in performance: Malaysia stood out with 28.7% YTD returns, outperforming the U.S. market, which was up 20.4%. The strong outturn in Malaysian equities this year has been driven by both an earnings expansion and a strong foreign exchange tailwind, the latter reflecting an increase in foreign earnings repatriation back onshore. On the other hand, Thailand has returned only 10.0% YTD, hindered by low earnings growth expectations and deteriorating valuations. However, a common thread on equity performance across economies has seen robust income generation, with dividend returns ranging from 2.7% to 5.2% YTD, surpassing the broader Asia ex-Japan equities index (2.5%) and U.S. equities (1.2%).
Exhibit 1: Dividend returns a core component for ASEAN equities
Year-to-date returns in USD terms
Source: FactSet, MSCI, J.P. Morgan Asset Management. Data reflect most recently available as of 20/09/24.
This is partly attributable to the higher payout ratio offered by ASEAN equities. Over the past decade, the dividend payout ratio has averaged 52%, significantly higher than the 36% for broader Asia ex-Japan equities and 35% for U.S. equities (Exhibit 2). This positions ASEAN equities well as an attractive option for income generation, provided earnings growth remains sustainable. Current consensus estimates for earnings growth this year stand at 15.3%, outpacing the 10.0% expected for U.S. equities.
Exhibit 2: ASEAN equities offer higher payout ratios than other markets
Past 10-year average dividend payout ratio
Source: FactSet, MSCI, J.P. Morgan Asset Management. Data reflect most recently available as of 20/09/24.
Valuations for ASEAN equities also appear attractive. On an absolute basis, the 12-month forward price-to-earnings ratio stands at 14.0x, below the 15-year historical average. ASEAN equities are more attractively priced compared to U.S. equities (21.3x) and other Asian markets such as India (25.1x) and Taiwan (17.1x).
A tale of two sectors
Compositionally, the MCSI AC ASEAN returns were supported by outperformance in key growth sectors such as information technology and communication services, which were up 23.8% and 42.9% YTD, respectively, underscoring the integration of ASEAN economies in the global goods cycle. In addition, financials, which make up more than two-fifths of the MSCI AC ASEAN index, was up 27.0% YTD, as ASEAN banks likely benefited from delayed expectations in the global rate cutting cycle. Meanwhile, weak domestic demand in the ASEAN region is evident in the underperformance of service-oriented sectors, with the consumer discretionary segment recording the worst sector performance, down 4.7% YTD. The divergence in the performances of the manufacturing and domestic sectors could in part reflect the impact of high domestic interest rates and subdued fiscal spending, even as the manufacturing sector has stayed somewhat resilient.
That said, we believe the underlying factors that have weighed on domestic demand will begin to fade, and services could turn a corner. On the fiscal front, most ASEAN economies have experienced delays in government spending during the first half of 2024 for various reasons, but this is expected to improve towards the year-end. Post-election government spending programs in Indonesia, wage reforms in Malaysia, and the potential implementation of the Digital Wallet Scheme in Thailand should bolster domestic consumption. On the monetary front, most ASEAN central banks have been hesitant to lower interest rates to maintain currency stability, despite inflation nearing their target ranges as we have noted in a recent piece. With financial stability concerns allayed in recent weeks, Bangko Sentral Ng Pilipinas and Bank Indonesia have lowered policy rates to strengthen economic growth. The start of the U.S. Federal Reserve’s (Fed’s) rate cutting cycle last week should provide the necessary flexibility for further monetary policy easing, providing tailwinds to corporates and households alike.
As global interest rates begin to decline, market attention will shift to the pace and extent of upcoming rate cuts. During 2022/23, ASEAN central banks were generally less aggressive than the Fed in raising interest rates given relatively lower rates of inflation, narrowing the interest rate differentials with the U.S. In that context, we expect the monetary policy cutting cycle in ASEAN to be relatively shallower than in the U.S. In the absence of a large slowdown and the focus on financial stability by ASEAN central banks, the possibility for aggressive rate cuts is limited. This scenario creates an optimal environment for ASEAN banks to manage net interest margins effectively while reducing pressure on non-performing loans, thereby supporting the upswing in financial stocks. However, investors should be mindful of the concentration risk that financial stocks present when investing in broad ASEAN indices.
ASEAN reaping benefits from structural pillars
Beyond the near term, there are structural factors supporting the performance of ASEAN equities. The ongoing reshuffling of supply chains towards countries such as Vietnam will likely continue regardless of the outcome of the U.S. Presidential Elections in November. The shift in production base towards the region also reflects the appeal of natural resources, such as the vast nickel reserves in Indonesia. As some parts of Asia fall into the ageing trend, favorable demographics in ASEAN could provide corporates with options of investment destinations.
Investment Implications
As the global equity market becomes increasingly concentrated in select names or sectors, investors may overlook opportunities in ASEAN that offer comparable returns, backed by robust fundamentals. North Asian markets, which have outperformed neighboring markets due to a global rush for artificial intelligence-related names, often face debates about the sustainability of their rally given their stretched valuations.
In our view, ASEAN equities present a compelling case given policymakers’ fiscal discipline and the imminent shift in monetary policy, which could in turn support the broadening of equity performance beyond the growth sectors toward core value sectors. Investors should maintain a diversified portfolio supported by solid earnings prospects, which ASEAN equities offer in the medium term. The region’s higher dividend payout ratios make it an attractive option for those seeking income generation, further enhancing its long-term investment appeal. Despite the cyclical tilt of ASEAN indices, the relatively higher income generation of these stocks could outperform even in economic downturns.