With an improving global macroeconomic backdrop and relatively cheap valuations after a torrid 2018, the omens are looking better for Southeast Asian stocks next year.
A likely pause in the Federal Reserve’s tightening cycle is already easing pressure on regional currencies, while lower oil prices are a boon for most markets. A continuation of those trends could suck back in some of the US$14 billion of foreign money that’s gushed out of ASEAN stocks this year.
"Valuations in most Southeast Asian markets have dropped significantly to quite attractive levels,” said Narongsak Plodmechai, chief executive officer at SCB Asset Management Pcl, Thailand’s biggest private money manager. “We’re upbeat about the prospects for next year.”
That’s not to say that 2019 will be without risks. The United States (US)-China trade war remains the big danger, particularly if recent signs of detente prove illusory. Thailand and Singapore - Southeast Asia’s two biggest markets by capitalisation - are also forecast to see significantly slower growth next year, while a potential slowdown in the US economy could damp demand.
Here’s a closer look at Southeast Asia’s six major stock markets.
2019 GDP forecast: 3.9 percent vs 4.2 percent in 2018
After being under military rule since May 2014, Thailand will hold its first election in eight years on 24 February. How smoothly the transition back to democracy goes will be key in determining the direction of the nation’s stocks.
A trouble-free vote could prompt a reversal of the almost US$9 billion of outflows from Thai stocks in 2018, as some foreigners have pulled money because of the political situation, said SCB Asset’s Narongsak. Campaign spending, and the economic policies of the new government may also be catalysts to improve business and consumer confidence, he said.
But given Thailand’s recent history, a smooth election is far from sure. Outcomes are still very uncertain and pose a threat to domestic business and consumer sentiment, Samsara Wang, an emerging markets strategist at Credit Agricole CIB, wrote in a 6 December note
2019 GDP forecast: 2.7 percent vs 3.3 percent in 2018
With valuations near the lowest level since early 2016, analysts are predicting the Straits Times Index is ripe for a rebound next year. Oversea-Chinese Banking Corp. forecasts the gauge will end 2019 at 3,632, 18 percent higher than current levels. United Overseas Bank Co. sees a 12 percent advance and CGS-CIMB Securities projects a seven percent increase.
There’s a possibility the government might call an early election next year and release “feel good” policy surprises in the run-up, according to OCBC and CGS-CIMB. With a mixed-use development opening at the airport and the partial opening of a new train line, the hospitality sector could get a boost, Lim Siew Khee, an analyst at CGS-CIMB, wrote in a note.
Still, a forecast slowdown in growth and Singapore’s vulnerability to the trade war remain risks. Investors should stick with defensive stocks including CapitaLand Ltd. and selected real estate investment trusts (REITs), says Carmen Lee, OCBC’s head of investment research.
2019 GDP forecast: 5.1 percent vs 5.2 percent in 2018
The relative stability of the rupiah after an aggressive series of rate hikes by Bank Indonesia have made conditions more favourable for the nation’s stocks. Nomura Holdings Inc. remains overweight on the country’s equities and has an end-2019 target of 6,800 for the Jakarta Composite Index, 10 percent higher than current levels. Mirae Asset Sekuritas Indonesia sees a 15 percent advance by the end of next year.
Recent polling suggests President Joko Widodo is on track to win a second term in the election in April. John Rachmat, a strategist at PT Pinnacle Persada Investama in Jakarta, says that could be the high point for Indonesian stocks due to a decrease in social spending following the vote and a possible increase in regulated fuel prices. He sees the Jakarta Composite Index (JCI) rising to around 6,700 before May, but probably falling from there.
Sean Gardiner, a strategist at Morgan Stanley in Singapore, reckons private sector spending can fill the gap left by less government largesse. “The political concerns the market had in 2017 have faded this year, which is constructive for the outlook for equities,” he said this month.
2019 GDP forecast: 4.6 percent vs 4.7 percent in 2018
The government will be focused on narrowing the budget deficit next year, which may crimp economic growth. On the flip side, investor perceptions that the market is becoming more transparent under the new administration could lure back some foreign money.
AmInvestment Bank Bhd. has an end-2019 target for the FTSE Bursa Malaysia Index of 1,820, 10 percent higher than current levels. The reintroduction of fuel subsidies, the capping of the electricity tariff and the removal of the goods and services tax (GST) could lift consumer spending, said Joshua Ng, head of equity research at the lender. Oil and gas, health-care and rubber gloves are the sectors that should do well next year, he said.
Ivy Ng Lee Fang, head of Malaysia research at CIMB Investment Bank Bhd., said she expects modest gains for stocks next year, with companies that can navigate “flattish growth” doing the best.
2019 GDP forecast: 6.4 percent vs 6.3 percent in 2018
Accelerating inflation has plagued the Philippines this year, and signs that it may have peaked should aid stocks in 2019. While government infrastructure spending is expected to keep growth robust, it will also strain the budget and possibly put pressure on the peso as the current-account deficit widens.
Haj Narvaez, president of BPI Securities, sees the Philippines Stock Exchange Index ending 2019 at 8,300, 10 percent higher than current levels. Sun Life Philippine is less optimistic, forecasting a five percent gain. But corporate earnings growth will need to quicken from this year’s estimated 11 percent for any rally to be sustainable, said Mike Enriquez, chief investment officer at Sun Life.
2019 GDP forecast: 6.6 percent vs 6.9 percent in 2018
Frontier-market Vietnam is the only Southeast Asian nation to lure foreign inflows this year (Singapore doesn’t provide the data publicly). While the economy continues to grow strongly amid surging foreign-direct investment (FDI), Vietnamese stocks aren’t that cheap anymore.
Bernard Lapointe, the head of research at Viet Dragon Securities JSC, said he was positive but not overly bullish, and expected the VN Index to stay in a range of 900 to 1,000 next year, compared with Friday’s close of 952.04.
Michel Tosto, head of institutional sales and brokerage at Viet Capital Securities, sees the gauge reaching 1,060 by end-2019, around 11 percent higher than currently. The stability of the dong and a forecast 16 percent growth in earnings per share, compared with an estimated 19 percent this year, will support the market, he said. - Bloomberg