- ASEAN is expected to see resilient growth and milder policy headwinds compared to other major markets. Such a backdrop should support relative performance against regional markets.
- We continue to see limited room for ASEAN earnings downside as a lot of pessimism has already been baked into consensus earnings estimates.
- ASEAN equities can be a resilient expression of Asian equity exposure, especially for investors looking to minimise China-related risks.
- We forecast an upside potential of +19% by FY24 with a dividend of over 3% and assign a Star Rating of 3.0 Stars “Attractive” for ASEAN equities.
A recap of recent ASEAN equity performance
2022 was a tough year for equities as a whole, and ASEAN was not an exception. While the region registered a -1.2% decline (SGD terms) since the start of 2022, it was much more resilient compared to major equity markets (Chart 1).
Looking ahead, we remain optimistic on ASEAN equities, especially when viewed against other Asian markets. We believe ASEAN could be a more resilient expression for Asian equity exposure as we expect many Asian markets to continue floundering in 2023. With a potential upside of 19% upside by FY24 coupled with a projected annual dividend yield of over 3%, we will initiate a Star Rating for ASEAN equities at 3.0 Stars “Attractive”.
Chart 1: ASEAN markets have remained more resilient than many other equity markets
Resilient growth and milder policy headwinds in 2023
We expect stronger growth in ASEAN this year as compared to major developed economies like the US and Europe which should experience a deceleration in growth– consensus estimates also echo this view (Chart 2). This should then be supportive of fundamentals and equity performance.
There are several reasons to believe in ASEAN’s growth resilience. First, a supportive commodities outlook should help to buttress export revenues for the region, while export volume softens as global growth moderates. Malaysia is a big exporter of palm oil, and Indonesia of commodities like coal and rubber. Therefore, it is unsurprising that the ASEAN bloc is also a major commodities exporter (Table 1), and we expect the overall export value to hold in the aforementioned ASEAN economies, adding some resilience to the growth picture.
Second, we expect ASEAN tourism to climb throughout this year, further supporting growth. While ASEAN tourism has already recovered strongly in 2022, arrival numbers remain below pre-pandemic levels so far (Chart 3). With pandemic uncertainties (e.g. new variants) continuing to subside, coupled with the additional wildcard of a China reopening, we believe we could see a prolonged recovery of tourism numbers in 2023 or even 2024. As the tourism boost becomes full-blown, it should be a tailwind for ASEAN growth, especially for tourism-reliant countries like Thailand.
Third, we expect ASEAN to face milder inflation headwinds relative to many economic regions in 2023. Many ASEAN central banks (except Singapore) are forecasting inflation to come in close to their long-term target in 2023, unlike major central banks in the West (e.g. EU, UK, US) (Chart 4). This means that ASEAN central banks could potentially adopt a less hawkish stance this year compared to DM Western peers, which could be less damaging to the region’s growth and equity performance.
Chart 2: Consensus expects stronger growth in ASEAN relative to other major developed markets
Table 1: About half of ASEAN’s top 10 exports are direct beneficiaries of higher commodity prices
| Top 10 Exports by HS2 Classification | HS2 Code | Weight (%) |
| Electrical machinery and equipment | 85 | 28.6% |
| Nuclear reactors and machinery | 84 | 10.5% |
| Mineral fuels, oils, waxes | 27 | 9.1% |
| Animal or vegetable fats, oils, waxes | 15 | 3.3% |
| Plastics | 39 | 3.1% |
| Rubber | 40 | 3.1% |
| Vehicles (incl. parts) | 87 | 3.1% |
| Optical / measuring / surgical parts and accessories | 90 | 2.7% |
| Iron and steel | 72 | 2.6% |
| Precious stones / metals / jewellery | 71 | 2.5% |
| Source: ASEAN Statistical Yearbook 2022, iFAST compilations.
Data as of end-2021. Descriptions in the first column have been simplified for clarity. |
||
Chart 3: Tourist numbers have picked up, but remain below pre-pandemic levels
Chart 4: Many ASEAN central banks forecast inflation will go back near target levels by end-2023 (unlike others in the West)
Little room for earnings downside given already-pessimistic consensus estimates
Consensus earnings estimates remain pessimistic for now – unlike the earnings rebound in 2017 to 2018, the ongoing earnings recovery from 2021 to 2022 was quite muted. In fact, ASEAN is one of the few markets remaining where earnings estimates have not recovered to pre-COVID (i.e. start-2020) levels (Chart 5) – in our view, this is unjustified given that COVID-related headwinds have already greatly subsided as of today.
In addition, we also believe there is a disconnect between consensus views on ASEAN’s growth outlook (Chart 2 above) and earnings outlook (Chart 5 below) respectively. Despite a relatively resilient growth outlook compared to the rest-of-world, analysts are pricing in a much less positive earnings outlook, and we believe there continues to be limited room for earnings downgrades in 2023.
Chart 5: Consensus forward earnings for ASEAN have not yet returned to pre-COVID levels (Jan 2020)
Resilient expression for Asian equity exposure
From a portfolio perspective, we see ASEAN as a more resilient expression for Asian equities. This is important considering we have recently turned bearish on Chinese equities and the broader, Asia-ex-Japan equities given the latter’s large exposure to China (estimated China exposure in MSCI AxJ Index is over 35%).
Related article: Downgrading emerging markets and Asia ex-Japan. How to re-position your portfolio
Related article: A painful and perilous economic recovery awaits China. Buyers beware.
Data shows that investors can substitute Asia-ex-Japan for ASEAN equities within their portfolio to cut their China correlation by about 25%. This substitution also comes with similar correlations with key equity benchmarks like the MSCI AC World Index and S&P500 Index (Chart 6). We observe a similar trend if we look at betas – the beta of ASEAN equities to a Chinese equity benchmark is almost half of that of Asia-ex-Japan equities (Chart 7). In other words, investors can potentially reduce China-related downside risks through an ASEAN allocation, which could be helpful given our bearish view on Chinese equities.
ASEAN equities have also consistently displayed lower volatility in returns compared to Asia-ex-Japan equities (Chart 8). We believe the surge in volatility for Chinese equities has directly led to higher volatility in EM and Asia-ex-Japan equities, given the large allocation of China in EM and Asia-ex-Japan indices. On average, ASEAN equity volatility is about 10% - 15% lower than that of EM and Asia-ex-Japan equities, and almost 40% lower than that of Chinese equities.
Chart 6: ASEAN equities show a lower correlation to Chinese equities and a similar correlation with other equity markets
Chart 7: ASEAN equities also show a lower beta to Chinese equities
Chart 8: ASEAN equities have consistently displayed lower volatility compared to AxJ equities
Remain positive on ASEAN equities as we head into 2023
To summarise, we like ASEAN equities due to (i) a less challenging macro outlook as compared to major economic regions; (ii) potentially limited earnings downside as much pessimism has been priced in; and (iii) our belief that ASEAN equities can be a more resilient expression of Asia-ex-Japan equities, the latter of which is more exposed to potential China-related headwinds. Valuations for ASEAN equities remain fair - we estimate they are trading at a P/E around its historical average of 15.6X, and slightly below our fair P/E of 16X (Chart 9).
With ASEAN growth likely to remain positive in the coming years despite a global recession, we forecast an upside potential of +19% by FY24 with a dividend of over 3% and assign a Star Rating of 3.0 Stars “Attractive” for ASEAN equities (Chart 10, Table 2).
Chart 9: ASEAN equities are trading near historical average P/E levels
Chart 10: MSCI AC ASEAN Index Price Performance and EPS
Table 2: ASEAN Equity Market Projections 2023 - 2024
| ASEAN (MSCI AC ASEAN Index) | FY21 | FY22 | FY23 | FY24 |
| PE Ratio (X) | 18.3 | 16.0 | 15.6 | 13.4 |
| Expected Earnings Growth YoY | - | 6% | 8% | 16% |
| Forward Earnings Per Share | 38 | 41 | 44 | 51 |
| Projected
Fair Price (based on a fair PE Ratio of 16X) |
- | - | - | 816 |
| Potential Upside from Today (%) | - | - | - | 19% |
| Projected Dividend Yield (%) | 3.0% | 3.3% | 3.1% | 3.7% |
| Source: Bloomberg Finance L.P., iFAST compilations, iFAST estimates. Data as of 06 Feb 2023. | ||||
Our recommended strategies for ASEAN equities
Investors who are looking for a more resilient exposure to Asian equities, or a direct exposure to Asia-excluding-China equities given the uncertainties within China, can therefore look into ASEAN equity products as a viable alternative. We have two recommended products: the Premia Dow Jones EM ASEAN Titans 100 ETF (HKEX:2810 or HKEX:9810), and Principal ASEAN Dynamic Fund Class SGD, both of which were also highlighted in our previous coverages of ASEAN.
The Premia Dow Jones EM ASEAN Titans 100 ETF was launched by Premia Partners – a specialist in Asia ETFs based in Hong Kong - on Aug 2018 (Table 3). This EM-focused ETF excludes Singaporean equities but includes a small allocation to Vietnamese equities, which was an intentional decision by Premia Partners on inception to capture the latter’s strong growth potential. (Investors who wish to find out more about ASEAN equities and this ETF can check out our video on iFAST TV for more information.)
Related video: Insights Into ASEAN Equities For The Year Ahead
The Principal ASEAN Dynamic Fund Class SGD was launched on Sep 2015 by Principal Asset Management Pte Ltd, which is a joint venture between Principal Financial Group (NASDAQ:PFG) and CIMB Group (BURSA:1023) established in 2006. This fund has been our recommended Unit Trust for ASEAN equities for the past three consecutive years, helped by its strong outperformance over its benchmark and peers since inception (Chart 11), and we continue to recommend it for investors seeking exposure to ASEAN equities.
Table 3: Description of Premia ASEAN ETF
| Descriptor | Premia Dow Jones EM ASEAN Titans 100 ETF |
| Ticker | HKEX:9810 |
| Underlying Index | Dow Jones EM ASEAN Titans 100 Index |
| Methodology | Market-cap weighted |
| Number of Holdings | 101 |
| Expense Ratio | 0.50% |
| Tracking Error | 3.71% |
| AuM (USD mn) | 53.37 |
| Average Daily Volume (1y history) | 1,681.1 |
| Source: Premia, Bloomberg Finance L.P., iFAST compilations. Data as of 6 Feb 2023. | |
Chart 11: Principal ASEAN Fund has performed strongly since its inception
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