ASEAN Outlook 2H26: Unattractive index; Go for SG and MY instead

• We downgrade MSCI ASEAN to 2.0 stars (Unattractive) as selective exposure to Singapore and Malaysia offers a superior risk-reward than the regional index.

• Singapore and Malaysia combine resilient growth, strong external balances and structural catalysts, positioning them as ASEAN's preferred equity markets for 2H26.

• Indonesia's fiscal credibility concerns and currency weakness, alongside Thailand's structural growth challenges, continue to constrain the regional index's re-rating potential.

• Although MSCI ASEAN offers approximately 16% upside with FY27–28 EPS growth of around 7–8%, the benchmark's returns are increasingly offset by lower-quality markets.

• We advocate a concentrated Singapore + Malaysia allocation to capture ASEAN's strongest earnings and macro fundamentals while avoiding Indonesia's downside risks and Thailand's value trap.

What has changed since our last update

Our Q2’26 update made the relative case for Singapore and Malaysia over Thailand and Indonesia. That core call is reaffirmed and has largely played out as expected: Singapore outshone to record highs, Malaysia was resilient, and Indonesia and Thailand lagged. What has changed is our view on the regional index itself, the severity of Indonesia’s tail, Thailand’s entry point and the macro regime.

Relevant Article: ASEAN 2Q26: SG and MY to outshine the peers

Figure 1: ASEAN bourses 1-year performance

1H26 Market wrap

1H26 opened under a Middle East oil shock that drove crude to ~USD 115/bbl, pushed US inflation back toward 3% and forced the Fed to cut its 2026 easing guidance from four reductions to one while holding at 3.50–3.75%; Kevin Warsh succeeded Jerome Powell as chair in May. By June, a fragile US–Iran de-escalation had walked oil back toward the mid-USD 90and the dollar index down to the 98–99 area. That macro backdrop produced significant performance dispersion across ASEAN markets.

The cross-market fundamentals corroborate the call.

Singapore and Malaysia pair sound external balances and contained inflation with the region’s most equity-relevant foreign direct investment, while Indonesia and Thailand carry the macro and policy strains that drove their de-ratings. Indonesia has a current-account deficit and a currency at record lows defended by a 5.75% policy rate, Thailand sub-2% growth against a 1.00% rate floor that leaves little room to respond.

The notable wrinkle is Indonesia, its ~5% GDP growth is the region’s fastest, suggesting its equity-market weakness is driven more by financial and structural concerns than macroeconomic fundamentals.

Table 1: ASEAN-4 economic data

Market	2026E GDP	CPI (y/y)	Policy rate	Current Account
Singapore	~3%	~1%	MAS NEER*	Large surplus
Malaysia	~4.0–4.5%	~2%	2.75%	Surplus
Thailand	~1.5%	~0.3%	1.00%	Surplus (narrowing)
Indonesia	~5%	~3.1%	5.75%	Deficit

Source: Bloomberg Finance, Data as of 16 June 2026.
*MAS runs an SGD nominal-effective-exchange-rate policy, not a policy rate.

Favour single country exposure instead of index approach

The oil-and-rates shock favoured Singapore and Malaysia while weighing on Indonesia and Thailand. Singapore has overtaken Indonesia as Southeast Asia’s largest equity market, and Indonesia’s MSCI ASEAN weight has collapsed to ~9% from the mid-teens.

The rationale for a selective approach remains compelling: the index’s upside is concentrated in two markets we can underwrite, while its risk is concentrated in two we would avoid. A focused Singapore + Malaysia sleeve captures the stronger markets while avoiding exposure to the weaker ones.

For a more detailed elaboration, kindly find the single country write-up below.

Table 2: Illustration of why we think single country exposure is better than index

Approach	Composition	Risk profile
MSCI ASEAN index (basket)	SG ~46%, MY ~16%, TH ~16%, ID ~9%, VN/other ~13%	Carries Indonesia frontier-reclassification tail and the Thailand structural drag; low-quality, no re-rating cushion.
Concentrated SG + MY (preferred)	Singapore and Malaysia only	Sheds the Indonesia tail and Thailand value trap; higher-conviction, cleaner.

Source: Bloomberg Finance L.P, iFAST Compilation, Data as of 22 June 2026.

Singapore (Overweight)

Singapore enters 3Q26 from strength: Q1 2026 GDP was revised up to ~6%, the current account printed a record surplus, and Enterprise Singapore lifted its non-oil domestic export forecast to 3-5% on AI-related demand. The MAS runs policy through the SGD nominal-effective exchange rate rather than a policy rate, and a modest appreciating bias both anchors imported inflation and reinforces the currency’s safe-haven role. The macro mix, firm growth, a strong external balance, a stable currency, exactly what global allocators seek when they are de-risking elsewhere in the region.

Three factors reinforce our positive call: (i) safe-haven inflows more evident than elsewhere in ASEAN, having reclaimed the title of the region’s largest market; (ii) the multi-year MAS market-development programme, the S$5bn equity-development allocation, single-family-office inflows, the lot-size reduction and value-unlock initiatives is structurally closing the long-standing liquidity discount; and (iii) an AI/data-centre capex cycle feeding the industrials and REIT complexes.

Figure 2: STI Index

Related Article: Singapore Outlook 2H26: Yield, growth and revitalisation in one market

Malaysia (Overweight)

Malaysia offers the region’s most balanced domestic-demand story: GDP of ~4.0-4.5%, a current-account surplus, and Bank Negara comfortably on hold at a 2.75% OPR, which preserves carry and currency stability. This is a lower-volatility cyclical exposure than the rest of the higher-beta bloc.

Consensus 2026 earnings growth of ~7% is roughly double 2025’s pace, with the largest rebounds in energy (off a low base) and technology, and valuations still below historical mean across many sub-indices. The market is under-owned where foreign ownership near multi-year lows (~19%), leaving scope for foreign participation to recover if sentiment improves.

Structural themes provide medium-term optionality on top of the cyclical recovery: the Johor-Singapore Special Economic Zone, the data-centre build-out and its power-demand pull-through, the National Energy Transition Roadmap (NETR), and Penang’s semiconductor cluster. A recovery in foreign flows, particularly alongside a softer US dollar, could support further market re-rating.

Two live overhangs keep this an overweight we would add to on weakness rather than chase: domestic politics where state elections in Johor and Negeri Sembilan over the next one-to-two months prompted net foreign selling in May and US semiconductor-specific tariffs, the key external tail for the Penang-linked tech complex.

Figure 3: KLCI Index

Related Article: Malaysia Outlook 2H26: Constructive, but Selective

Thailand (Underweight)

Thailand is the region’s structural laggard. The Bank of Thailand projects ~1.5-1.6% growth in 2026, close to the weakest in three decades excluding crisis years and has cut its policy rate to a 1.00% floor (the lowest since 2022), leaving almost no conventional easing room. A household-debt overhang suppresses consumption, credit continues to contract, exports are projected to slow sharply as US tariffs bite and a strong baht erodes competitiveness, and the closed Cambodia border weighs on regional trade. Tourism, the swing variable, is recovering only gradually after contracting.

The SET has rallied ~33% off its 52-week low on a relief trade, thanks to oil de-escalation, foreign inflows and electronics rebound led by heavyweight Delta Electronics, so this is no longer cheap entry despite the weak fundamentals.

A sustained recovery would likely require either a durable tourism rebound or credible structural reforms. The rally’s narrow, momentum-driven leadership is itself a risk. We would avoid chasing the recent rally, hold the market neutral within an underweight stance, and would only turn constructive on a clear catalyst.

Figure 4: SET Index

Indonesia (Underweight)

Indonesia is the clearest negative in the region yet not because of its economy. GDP is running ~5% (Q1 2026 accelerated to +5.6%), the fastest in ASEAN, and foreign-exchange reserves remain ample.

The weakness is primarily financial rather than macroeconomic: the JCI is down ~31% year-to-date, the worst major equity index globally in 2026, having ceded Southeast Asia’s largest-market crown to Singapore. The drivers are fiscal-credibility erosion under President Prabowo, currency stress and index-structure risk, not growth. That distinction is the heart of our call: a cheap market with a sound economy can still be a valuation trap if the policy and structural risks are mispriced.

The rupiah has hit successive record lows around 17,700-18,000/USD, forcing Bank Indonesia into ~100bp of defensive hikes since May (the BI-Rate now 5.75%, the highest in over a year) plus FX intervention and higher SRBI yields to attract portfolio inflows. Tightening into weakness stabilises the currency but throttles domestic demand and compresses equity multiples, a poor backdrop for the index even as headline growth holds.

Figure 5: JCI Index

Revised downward to 2.0 stars ‘Unattractive’, despite 16% upside

We model regional EPS growth of ~7% in FY27E accelerating to ~8% in FY28E, a recovery from a subdued 2025 as the lagged impact of monetary easing and fiscal support feeds through. The composition matters: Singapore’s banks-led, high-single-digit delivery and Malaysia’s ~7% rebound (roughly double 2025) are expected to remain the key earnings contributors, while Thailand’s low-single-digit growth and Indonesia’s near-flat FY26E (as Bank Indonesia tightens into weakness) are the drags.

Table 3: MSCI ASEAN valuation

	FY26E	FY27E	FY28E
PE Ratio (X)	15.8	14.7	13.7
Earnings Per Share (EPS)	48.4	52	55.9
Expected Earnings Growth		7.4%	7.5%
Current Price	766.8
Upside Potential (%)			16.6%
Target Price (USD) (Fair PE of 16x)			894

Source: Bloomberg Finance, iFAST, Data as of 22 June 2026