- ASEAN economic data has remained robust thus far, and we expect growth for the region to remain resilient entering 2023, amidst the ongoing regional reopening and recovery.
- ASEAN inflation has climbed significantly and will necessitate some tightening of monetary policy. However, we expect ASEAN inflation to remain milder than major markets helped by structural factors, and this should lead to a comparatively less hawkish response from ASEAN central banks.
- Earnings estimates continue to remain near historical lows, at levels seen during periods of severe market downturns (COVID and GFC), and we believe there is limited downside to earnings given the reopening ahead.
- ASEAN equities are trading at a slight valuation discount to their historical average, and we see a solid +31% potential upside by FY24.
How have ASEAN equities performed this year?
Related article: ASEAN: A Region of Reopenings and Recovery
Chart 1: ASEAN equities have held up reasonably well relative to peers
ASEAN economy could remain relatively resilient amidst the inevitable global slowdown
ASEAN has traditionally been an export-reliant bloc, and its economies are not immune to this global growth slowdown, particularly in Western DMs where the risk of a recession grows. However, for the bloc, the largest trading partners are situated within Asia, with intra-ASEAN trade accounting for over 20% of exports (Chart 2). This makes ASEAN relatively more exposed to the demand backdrop in Asia, rather than that in the US and Europe. With Asian demand supported by the recent re-opening wave, domestic recovery, and milder inflation headwinds relative to the West, we believe this Asia-focused export mix should help to provide some support for ASEAN economies when demand from the West falls.
Chart 2: ASEAN mainly exports within Asia (and especially within ASEAN)
Economic data remains robust despite macro headwinds, with ASEAN Manufacturing PMI ticking higher, contrasting with its North Asian (e.g. China and Korea) and global peers which saw their PMI dip below 50, (Chart 3). In addition, export growth remains strong in ASEAN with key markets like Singapore, Indonesia, and Malaysia showing double-digit growth (YoY) for over 12 consecutive months (Chart 4). These findings suggest that growth in ASEAN continues to remain resilient on the back of a domestic recovery and regional reopening tailwinds.
To be clear, we are not expecting economic data to continue strengthening over the next few months – it is more likely in our view that economic data will gradually soften over time on a global scale. This is likely due to the global growth slowdown, and the high-base effects of the recovery. However, on balance, we expect the ASEAN economy to continue growing over the next year, albeit at a slower pace compared to the previous year, alongside the weakening global economy.
Chart 3: ASEAN Manufacturing PMI has continued to tick upwards above 50, diverging from peers
Chart 4: Exports growth remains strong across ASEAN, with a long period of double-digit growth in several countries
Tightening monetary policy is inevitable, but will likely remain less hawkish than peers
ASEAN central banks have recently begun to tighten monetary policy in the face of persistent inflationary pressures, with recent inflation readings coming in significantly above policymakers’ stated targets (Chart 5). Nonetheless, we believe that policymakers will be able to rein in inflation, likely in a drawn-out attempt over 2023.
One structural reason for relatively milder inflation in ASEAN is the large number of price controls within the region for both food and energy. This has been supplemented by other policies by individual governments, such as Malaysia’s export ban on chicken and eggs, or Indonesia’s export ban on palm oil. On top of the larger number of price controls, ASEAN is also less exposed to idiosyncratic headwinds faced by regions like Europe, which has seen a surge in energy inflation arising from their tensions with Russia.
While we believe ASEAN inflation will remain at elevated levels, comparatively it should be milder than many major markets such as the US and Europe. This implies that the likelihood of jumbo-sized rate hikes (similar to what we’ve seen in the US with consecutive 75bps hikes) should remain low and thus, we expect a less hawkish response from ASEAN central banks which should be less damaging to the region’s growth and equity performances.
Chart 5: ASEAN inflation has gone above-target inflation, but to a smaller extent than Western DM peers
Limited downside to ASEAN equity earnings even in a slowdown scenario
In our previous article, we noted that ASEAN earnings lagged behind other major markets due to pandemic headwinds, and expressed our belief that earnings will catch up as these pandemic uncertainties fade with the regional reopening. We continue to stick with this view and expect milder downsides for ASEAN earnings ahead.
First, we believe that the already-low ASEAN earnings estimates suggest lesser room for further downwards revisions. So far in the year-to-date, we have seen a strong downwards revision to estimated earnings (-10%) which resulted in earnings estimates falling to near-historical lows, levels seen only in two periods - COVID-19 (2020) and Great Financial Crisis (2009) (Chart 6). This crash in EPS estimates implies heavily that significant negativity has already been priced in. This is further reinforced by our belief that ASEAN is likely to continue benefiting from some reopening tailwinds, which may buffer against further earnings downgrades in 2022.
Chart 6: Earnings estimates have fallen to near-historical lows
Second, we believe that ASEAN equities’ large exposure to Financials could further help to buffer earnings in this rising rates environment (Chart 7). This is because a rising rates environment tends to support higher net interest margins and net interest income for Financials in general. Many key ASEAN Financials companies (with large allocations in the MSCI AC ASEAN Index) also boast dominant market positions in their respective markets (e.g. DBS in Singapore, Bank Central Asia in Indonesia, and Public Bank in Malaysia) (Table 1) as well as robust balance sheets after a solid recovery post-Covid. As such, we believe the market position, earnings and balance sheet strength should provide added resiliency in the slowing macro environment (Chart 8).
Therefore, we keep our previous FY22 earnings estimates at the same level as before, but slightly revise our FY23 and FY24 estimates downwards, to account for the weaker global growth environment today. We forecast earnings growth to come in at +8% in FY23 and +12% in FY24 for the index.
Chart 7: ASEAN has a large allocation towards Financials compared to peers
Table 1: Top holdings of MSCI AC ASEAN Index contain many market leaders for Financials, in respective geographies
| Name | Country | Sector | Weight (%) |
| DBS Group Holdings | Singapore | Financials | 7.4% |
| Bank Central Asia | Indonesia | Financials | 5.5% |
| OCBC Bank | Singapore | Financials | 4.9% |
| United Overseas Bank | Singapore | Financials | 3.8% |
| SEA A ADR | Singapore | Comms. Svcs. | 3.6% |
| Bank Rakyat Indonesia | Indonesia | Financials | 3.5% |
| Singapore Telecom | Singapore | Comms. Svcs. | 2.7% |
| Telkom Indonesia | Indonesia | Comms. Svcs. | 2.5% |
| Public Bank | Malaysia | Financials | 2.3% |
| Bank Mandiri | Indonesia | Financials | 2.0% |
| Source: MSCI, iFAST compilations. Data as of 30 Sep 2022. | |||
Chart 8: Financials in MSCI AC ASEAN Index are expected to see robust earnings growth in FY22 and FY23
ASEAN equities still fairly valued even after earnings downgrades
To summarise, we remain cautiously optimistic on ASEAN equities. We believe the ASEAN economy can remain resilient amidst an incoming slowdown, something that major markets like the US and Europe may struggle to do so. Furthermore, ASEAN earnings have already priced in significant negativity so far this year, and we believe there are lesser downside risks for these earnings moving ahead.
Currently, valuations for ASEAN equities remain fair. The region is trading (15.3x) at a slight discount below its historical average forward P/E ratio of 15.7x (Chart 9). With earnings already pricing in a negative scenario, we believe there is upside for ASEAN equities driven by moderate earnings growth in the coming years. Using our target P/E ratio of 16.0X, we forecast an upside potential of +31% by FY24 (Chart 10, Table 2).
Chart 9: ASEAN equities are trading at a slight discount (-3%) to their historical average
Chart 10: MSCI AC ASEAN Index Price Performance and EPS
Table 2: ASEAN Equity Market Projections 2022 - 2024
| MSCI AC ASEAN Index | FY21 | FY22 | FY23 | FY24 |
| PE Ratio (X) | 18.6 | 14.7 | 13.7 | 12.2 |
| Expected Earnings Growth YoY | - | 6% | 8% | 12% |
| Earnings Per Share (EPS) | 37.8 | 40.0 | 43.0 | 48.0 |
Projected Fair Price (based on fair PE Ratio of 16X) |
- | - | - | 768 |
| Potential Upside from Today (%) | - | - | - | 31% |
| Projected Dividend Yield (%) | - | - | - | 4.3% |
| Source: Bloomberg Finance L.P., iFAST compilations, iFAST estimates. Data as of 24 Oct 2022. | ||||
Products to consider for ASEAN Equities
Investors who wish to add some resiliency to their portfolio through ASEAN equities can consider some of our recommended products on our platform, namely the Premia Dow Jones EM ASEAN Titans 100 ETF (HKEX:2810/9810) and Principal ASEAN Dynamic Fund Class SGD, which we also highlighted in our previous outlook for ASEAN.
As discussed in our previous article, the Premia Dow Jones EM ASEAN Titans 100 ETF excludes Singaporean equities but includes a small allocation into Vietnamese equities, in line with its emerging markets (EM) classification. Despite the difference in geographical allocations, this ETF has performed very similarly to the broader ASEAN equity market in the YTD, as the weak performance in Vietnamese equities was mitigated by the strong performance in Indonesian equities (where the ETF has a larger allocation relative to the MSCI AC ASEAN Index) (Chart 11).
Chart 11: Performance of ETF has been similar to that of MSCI AC ASEAN Index
The Principal ASEAN Dynamic Fund Class SGD has remained in our recently 2022/23 Recommended Funds List, marking three consecutive years as our recommended unit trust for ASEAN equities, helped by its strong long-term outperformance over its benchmark and peers (Chart 12). While it has not been immune to the selloff in terms of SGD total returns (-9%), it has nonetheless fared better than the MSCI AC ASEAN Index (-14%) and an aggregate of its peers (-14%), which is a reflection of its good downside risk management. Looking ahead, we believe this fund remains poised to achieve one of the best risk-adjusted returns amongst its ASEAN fund peers, and recommend this fund for investors looking to gain exposure to ASEAN equities.
Chart 12: Principal ASEAN Dynamic Fund has shown strong performance since its inception
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