Regulatory nervousness over China diverts some portfolio flows to Southeast Asia, providing profit opportunities even to disadvantaged markets like the Philippines and Malaysia, according to a JP Morgan study.
In an interview with The Inquirer, Rajiv Batra, South Asia and Emerging Markets (EM) strategist at JP Morgan, also said investors were now less concerned with stock valuation or the emergence of new variants. of COVID-19.
“They’re more concerned with the growth rate they’re tracking and with changing vaccination rates. On this basis, we believe that growth estimates will be revised upwards if mobility picks up, driven by easing restrictions, increased retail sales, a recovery in travel and demand. tourism, ”said Batra. “An above-trend global growth rate will be another key factor, which will support exports and industrial production.”
In a research note released earlier this month, JP Morgan noted that all of the Association of Southeast Asian Nations (Asean) countries except Vietnam have recorded entries. net of foreign capital in August. There were net foreign purchases worth $ 311 million in Indonesia, $ 251 million in Malaysia, $ 175 million in Thailand and $ 33 million in the Philippines, while Vietnam recorded an outflow of $ 277 million.
In the case of the Philippines, August marked the first time in 21 consecutive months that foreigners turned into net buyers.
Prior to August, Asean as a whole had seen collective net equity outflows for six consecutive months, while foreign ownership was also at record highs.
“The rotation out of China is occurring more due to regulatory uncertainty regarding the Internet and e-commerce sectors. We now know that China is one of the emerging markets, contributing nearly 40% of the [MSCI EM] index. So if the money comes from China, it will be good for everyone in the region because it is 40% compared to the rest (60%), ”Batra said.
During the pandemic, Batra said the market consensus had become “underweight” to “neutral” or “overweight” the Philippines, meaning they are investing less than the allocation prescribed by the MSCI EM index. . It is the opposite of “overweight”.
Market consensus became “underweight” as investors became “wary” of the country’s resumption of growth and how it would emerge from the pandemic, Batra said.
A year after the start of the pandemic, the government reimposed strict lockdown restrictions earlier this year as daily COVID-19 infections soared to new highs.
“Fortunately, they have done quite well in terms of higher vaccination rates and are responding well to requests from investors in terms of better health strategy and policy and better vaccination rates. But there is always this concern about the recovery and also the size of the market – because the Philippines is the smallest market in terms of volume and liquidity among all the ASEAN countries, ”he said.
“But if the situation and the recovery were to have an upward trajectory, I have no doubts that the Philippines will again be in favor of investors and will be a favored market for foreign investors,” he said.
In the case of Malaysia, he said the market consensus has been underweight this market for the past four or five years due to the lack of a long-term catalyst in terms of reforms, declining profits. business over the past five years and political uncertainties.
JP Morgan has an “overweight” rating on Thailand, Indonesia, Singapore and Vietnam.
Overall, Batra said Asean policymakers were doing their best to weather the tough times and using different public health strategies to control the infection with less impact on the country’s economic growth.
For investors moving some funds out of China, Batra said the main considerations for alternative destinations were: the trajectory of the economic recovery, the outlook for corporate earnings growth, the vaccination rate and the incentives of policymakers. Consensus positioning is also seen as a factor, as investors want to know how crowded a particular market is.
The regulatory regime for new economy sectors is also seen as a potential driver. “So in the case of Asean, or any other country, if the sectors of the new economy are not facing headwinds on the political side, they will be very happy to transfer money from the Internet. Chinese or other sectors with high political risks, ”Batra said. .
Among other risks, JP Morgan sees the US Federal Reserve announcing a gradual reduction in monetary stimulus measures by November or December. However, he does not expect a repeat of the “taper tantrum” that hit the region in 2013.
In addition to better macroeconomic fundamentals compared to 2013, JP Morgan’s research noted that the region was better protected given the meager equity allocation of global investors to ASEAN and the considerably larger foreign exchange reserves of various economies in the region that can cushion an exodus of speculative capital.
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