ASEAN: A Region of Reopenings and Recovery

• ASEAN is reopening its borders to tourism, which will be a strong boost to ASEAN GDP and employment. This in turn should support equity prices.
• ASEAN equities earnings should be supported by multiple factors, such as (i) ASEAN equities’ pro-cyclical tilt, (ii) an improving situation in China, and (iii) a sustainable earnings rebound from historical lows.
• While ASEAN central banks are expected to normalise policy quicker than expected due to rising inflation, we believe the pace of tightening in ASEAN will unlikely be as urgent as the US.
• As a whole, we remain cautiously optimistic on ASEAN equities. Valuations are marginally expensive at the moment, but multiples should look more palatable over time if our earnings forecasts materialise. Using our target P/E ratio of 16.0X, we forecast an attractive upside potential of +21% by end-2024.
• Investors looking to gain exposure to ASEAN equities can consider our two recommended products: Premia Dow Jones EM ASEAN Titans 100 ETF (HKEX:2810) and Principal ASEAN Dynamic Fund Class SGD.

ASEAN equities (gauged by the MSCI AC ASEAN Index) broadly comprise equities from ASEAN-5, namely Singapore, Indonesia, Thailand, Malaysia, and Philippines (Chart 1). While equities have generally done poorly in 2022, ASEAN equities have managed to remain relatively resilient, falling by just 9% year-to-date, compared to its global equity peers which have fallen almost 20% year-to-date (in USD terms) (Chart 2). In this article, we reiterate our cautiously optimistic view on ASEAN equities as a whole, particularly as ASEAN reopens itself to the world.

Chart 1: MSCI AC ASEAN Index contains equities from ASEAN-5 countries

Chart 2: ASEAN equities have held up relatively well compared to peers

Reopening will be shot in the arm for ASEAN

While ASEAN had an initially slow vaccination rollout, many key ASEAN countries now have vaccination rates above the global average, with Singapore leading the pack (Chart 3). As a result, ASEAN is now on the cusp of a full reopening, and the number of hotel searches already far surpasses pre-pandemic levels (Chart 4). Even though a complete tourism rebound is unlikely due to China’s strict border controls, the low pandemic-era base should still contribute to strong growth in tourism revenues.

The improvement in tourism outlook will be a significant boost to the region’s growth momentum in 2H22. Based on World Travel & Tourism Council data, in 2019 (pre-pandemic), the travel and tourism industry contributed a notable 12% of ASEAN’s GDP and hired 42.6 million workers which represented 13% of total employment. In other words, the expected rebound in tourism should not only have a direct effect on GDP but also an indirect effect through higher employment rates within ASEAN.

Thus, we expect the region’s growth to see a steady rebound from 2H22 onwards, which is in line with Asian Development Bank estimates of around 5% GDP growth in 2022 and 2023. Historically, ASEAN equity prices have generally tracked the region’s economic momentum (Chart 5), and we expect the improving macro backdrop in 2H22 should support equity prices.

Chart 3: Most ASEAN countries have above-average full-vaccination rates

Chart 4: Number of ASEAN hotel searches and bookings has started to spike up

Chart 5: ASEAN equity prices have generally tracked ASEAN-5 economic momentum

ASEAN equities likely to see solid earnings rebound

We expect ASEAN equities to see a solid earnings rebound of 6% in 2022 and 13% in 2023, buoyed by the improving macro outlook. Across its 10-year history, this is relatively high as positive year-on-year EPS growth averages around 10% (Chart 6). On a relative basis, ASEAN equities are also expected to generate stronger earnings growth than most global and EM peers (Chart 7). Even though global earnings are starting to see profit headwinds due to rising input costs and moderating global growth, we see sufficient support for ASEAN equity earnings arising from factors like (i) ASEAN equities’ pro-cyclical tilt; (ii) improving situation in China; and (iii) for a sustainable earnings rebound from historical lows.

First, ASEAN equities have heavy allocations into traditionally cyclical sectors like financials (37%), which are highly levered to economic growth. When growth momentum in the region improves, earnings tend to pick up as well. Thus, with our view of an improving macro backdrop, we expect greater earnings upside given ASEAN equities’ pro-cyclical tilt. From the bottom up, we expect the ASEAN Financials sector to form the backbone of the region’s EPS strength. The major banks are expected to generate above long-term average EPS growth, supporting earnings for the broader index (Chart 8).

In addition, a positive turn in China on lockdowns and government policy could become a big upside to the ASEAN equities, especially as many negative factors have already been priced in through lower equity prices and reflected in weaker economic data. This should then lead to positive spillover effects on the ASEAN economy and equities in a variety of ways, such as (i) greater tourism revenue from Chinese tourists (which make up 20% of ASEAN tourist arrivals); (ii) stronger demand for ASEAN exports (China is the largest single-country trading partner of ASEAN); and (iii) easing of supply-chain bottlenecks and shipping delays. While the Chinese pandemic situation remains very fluid, we reiterate that the risk-reward remains very much tilted towards a positive outcome for China.

With these earnings tailwinds in mind, we believe it may finally be time for ASEAN equity earnings to see a stronger recovery. In 2020, we saw their largest YoY EPS decline in history (-34%), resulting in an unprecedented EPS collapse to 10-year lows across many ASEAN equity indices. The subsequent EPS rebound in 2021 was relatively lacklustre on an absolute and relative basis, and ASEAN continues to be one of the few exceptions where EPS has not fully recovered from 2019 to 2021 (Chart 9). The slow recovery in ASEAN equity earnings was due to the severity of COVID-19, which led to significant earnings uncertainties in the region. However, as we have highlighted above, pandemic uncertainties are easing while earnings tailwinds are present. Thus, we no longer expect earnings to lag behind and see a sustainable rebound over the next two years.

Chart 6: Expect solid growth in ASEAN equity EPS, especially in 2023 and 2024

Chart 7: ASEAN equities expected to see solid earnings growth compared to most peers

Chart 8: Key ASEAN financials expected to see solid earnings growth from 2022 – 2024

Chart 9: ASEAN is one of few regions where EPS has not fully recovered

Key risk – inflation and monetary policy

Despite our optimism over the growth recovery, we note that soaring inflation and tighter monetary policy within ASEAN will pose as key equity risks. Inflation amongst several ASEAN-5 countries has picked up significantly this year and is on track to exceed medium-term inflation targets set by their respective central banks (Table 1). Central banks have already begun to tighten policy (e.g. BNM’s [Malaysia] surprise rate hike in May), while others are feeling the increased pressure to hike rates, including Philippines which has signalled 2 rate hikes of 25bps each by Aug 2022.

Table 1: Some ASEAN countries are at risk of overshooting their medium-term inflation targets

Chart 10: ASEAN inflation is not yet at extreme levels, unlike the US

Cautiously optimistic on ASEAN equities especially as a reopening play

To summarise, we remain cautiously optimistic on ASEAN equities, especially as a play on the reopening theme observed across the region. We believe the reopening will have a notable effect on ASEAN equities due to the latter’s pro-cyclical tilt, while our expectation of the China situation improving should also have positive spillover effects on the ASEAN economy and equities. Coupled with the fact that earnings have thus far only seen a lacklustre rebound from historical lows, we believe there is further room for a stronger and more sustainable rebound over the next two years.

With that in mind, investors should note that valuations for ASEAN equities are marginally expensive at the moment, trading at about a 3% premium to its 10-year historical average (Chart 11). These elevated valuations were the result of the historic earnings collapse described previously, but we expect multiples to look more palatable over time if our earnings forecasts materialise. Using our target P/E ratio of 16.0X, we forecast an upside potential of +21% by end-2024.

Chart 11: ASEAN equity valuations are marginally expensive

Chart 12: MSCI AC ASEAN Index Price Performance and EPS

Table 2: ASEAN Equity Market Projections 2022 – 2024

Recommended Products

For investors looking to gain exposure to ASEAN equities and their reopening story, we have two recommended products on our platform: Premia Dow Jones EM ASEAN Titans 100 ETF (HKEX:2810) and Principal ASEAN Dynamic Fund Class SGD (Table 3).

The Premia Dow Jones EM ASEAN Titans 100 ETF (HKEX:2810) is a passive ETF that tracks the largest 100 companies within five EM ASEAN countries – Malaysia, Indonesia, Thailand, Philippines, and Vietnam. This ETF is mainly exposed to financials, consumer products, and communications like the MSCI AC ASEAN Index, but investors should note that this ETF does not include Singapore, as it invests specifically in emerging ASEAN equities. Compared to the MSCI AC ASEAN Index, this ETF has larger allocations into the remaining ASEAN-5 countries, as well as a small 7% allocation into Vietnam. As such, it may be more suitable for investors who wish to invest in the high-growth segments of ASEAN, without further increasing their exposure to Singapore equities. This ETF has an expense ratio of 0.50%.

The Principal ASEAN Dynamic Fund Class SGD is an active fund that aims to achieve capital appreciation over the medium to long-term by investing in the ASEAN-5 countries as well as Vietnam. This fund is notably underweight Singapore (18%) compared to the MSCI AC ASEAN Index (34%) and is overweight Malaysia instead (27% vs 17%). In addition, it has a relatively large cash position (11%) as the fund manager sees cash as a function of bottom-up and top-down management processes, and this may have helped to manage the fund’s downside risks, especially in uncertain market conditions. On the whole, it has outperformed its target return of 9% p.a. since inception as of 30 Apr 2022, justifying its relatively high expense ratio (2.19%). (We will be publishing an in-depth article on this fund and its strategy in the coming weeks, so stay tuned.)

Table 3: Recommended Products