• Funds Blog
• October 31, 2024

Southeast Asia's Stock Markets Weaken

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In the past week, stock markets across the Asia-Pacific region faced significant declines, particularly in Southeast Asia, where all major indices recorded lossesThis decline can be attributed to several factors affecting investor confidence in the region.

The Ho Chi Minh Stock Index in Vietnam led the downturn with a drop of nearly 2%, marking a weekly decline of 1.92% to 1,230.48 pointsOther Southeast Asian markets followed suit, with the Jakarta Composite Index in Indonesia slipping by 1.05% to 7,088.87 points, while Thailand's SET Index decreased by 1.21% to 1,367.99 pointsMalaysia's Kuala Lumpur Composite Index saw a more significant drop of 1.66%, closing at 1,602.41 pointsSingapore’s Straits Times Index barely changed, with a slight drop of 0.01% to 3,801.56 points, while the Philippines’ Manila Index fell by 1.63% or 107.49 points, ending at 6,496.32 points.

The widespread downturn in Southeast Asia's markets is largely linked to the uncertainties surrounding the so-called "2.0" trade policies being discussed globally

Investors are particularly concerned about potential tariff increases that could hinder Southeast Asia's export-driven economiesIn response to these uncertainties, many investors have reduced their risk appetite, leading to capital outflows from the region's stock marketsAdditionally, the increasing attraction of USD assets may exacerbate these capital outflow pressures.

While Japan's Nikkei 225 index also took a hit, falling by 1.77% or 704.14 points to 39,190.4 points, both Australia’s and South Korea’s markets recorded slight gainsThe S&P/ASX 200 in Australia rose by 0.53% to 8,294.1 points, while South Korea's KOSPI index increased by 3.02% to 2,515.78 points, marking a continued upward trend for two consecutive weeks.

Looking ahead, market analysts are keenly observing how the "2.0" trade policies will affect Southeast Asian markets, particularly in light of ongoing foreign sell-offs, which have notably impacted Malaysia and the Philippines.

Foreign investors have been actively exiting the Malaysian stock exchange, with net sales reaching 231.9 million ringgit during the week ending December 27, 2024. The MIDF Research report highlighted that utilities, construction, and healthcare sectors faced the most significant net outflows, totaling 119.5 million ringgit, 88.5 million ringgit, and 68.1 million ringgit, respectively

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Similarly, foreign investors withdrew approximately 12.9 billion pesos from the Philippine stock market by the end of 2024, as the strengthening dollar attracted global fund managers away from emerging markets.

Given Southeast Asia's predominantly export-oriented economies, threats of U.Stariffs pose a significant riskThis could lead to a deceleration in economic growth and a decline in corporate performance across the regionFurthermore, ongoing inflationary pressures in the U.Shave overshadowed expectations for reductions in interest rates by the Federal Reserve, leading to increased financial market volatility.

The future trajectory of Southeast Asian stock markets hinges on various factors, including the implementation of U.Smonetary policy, trade policies, and the economic fundamentals of countries within the regionForecasts suggest that the performance of Singapore's Straits Times Index and Vietnam's Ho Chi Minh Index may remain relatively robust into the fourth quarter of 2024, with Singapore showing a 6% increase, and Vietnam experiencing only a marginal 1.6% decline, largely due to their strong economic fundamentals and exceeding growth expectations.

In the short term, Southeast Asian markets can expect continued volatility and pressure

The uncertain global economic climate, highlighted by fluctuations in U.Seconomic data and Federal Reserve policy changes, is likely to affect market sentiments and capital flowsConcurrently, issues such as structural problems within some Southeast Asian economies and weak corporate profit growth present challenges that are unlikely to see immediate resolutions.

From a long-term perspective, challenges stemming from a strong dollar, capital outflows from emerging markets, strained trade relations, and geopolitical tensions are expected to persist through 2025. However, the inherent resilience of Southeast Asia's economic growth and positive factors such as enhanced regional economic cooperation and structural upgrades in various industries can bolster the stock market amidst these challenges.

One advantage for Southeast Asian stock markets lies in their comparatively low valuations

The MSCI ASEAN Index trades at a forward price-to-earnings ratio of 12.8 times, which is over one standard deviation above its five-year average, indicating that there is still a degree of investment attractiveness in these markets, especially as global funds seek undervalued opportunities.

Moreover, institutions have raised their economic outlooks for Southeast Asia, showcasing the region's recovery momentumAccording to forecasts from the Asian Development Bank and other organizations, the overall economic growth rate for Southeast Asia is projected to reach 4.7% in 2024, up from 4.1% in 2023, emphasizing the region's resilience and growth potential.

Countries like Vietnam, the Philippines, and Indonesia are emerging as key drivers of economic growth in the region, with projected GDP growth rates of 6.4%, 6%, and 5%, respectivelyThis emphasizes the remarkable economic vitality in Southeast Asia, particularly when compared to other regions struggling with weak economic performance.

Factors contributing to this uptick include easing inflation, a booming international tourism sector, an upward cycle in the global semiconductor industry, and proactive fiscal policies from regional governments

The recent inclusion of Indonesia and Thailand as members of the BRICS collaboration framework is also noteworthy, as it brings considerable economic benefitsBy being part of this initiative, both countries can tap into funding and technology support to advance domestic projects in infrastructure and energy, while also enhancing trade relations with other BRICS nations.

Data from the Southeast Asia Institute also highlighted robust growth in manufacturing PMIs for the Philippines towards the end of 2024, supported by loose monetary policyThe rapid increase in new orders and production indicates a strong recovery in manufacturing activity, with the PMI having expanded for 16 consecutive months, reaching its highest level since April 2022, validating the region's production capabilities.

Meanwhile, Southeast Asian currencies, including the Thai Baht and Singapore Dollar, have shown some stabilization against the U.S

dollar, amid fears of tariffs under the "2.0" frameworkIn the short term, these currencies may remain pressured by the continued strength of the dollarHowever, as the U.Seconomy shows signs of slowing down and interest rate cut expectations resurface in the latter half of 2025, it is anticipated that Southeast Asian currencies can stabilize, particularly among nations with strong economies and flexible policies.

Looking to which Southeast Asian currency might stabilize next, experts point out that the Singapore Dollar and Vietnamese Dong display relative stability due to their strong economic fundamentalsThe State Bank of Vietnam's active management of the Dong's exchange rate through timely interventions when pressures arise contributes to this stability.

In Japan, the Bank of Japan recently released a regional economic report highlighting the necessity for wage increases due to a structural labor shortage

Data released from Japan's Ministry of Health, Labor, and Welfare indicated a year-on-year increase in base wages by 2.7% for November 2024, accompanied by a nominal wage rise of 3%, exceeding previous forecasts by economistsThis trend raises questions on whether the Bank of Japan will revise its interest rates in January based on positive economic indicators.

However, concerns persist, with actual cash earnings falling by 0.3% year-on-year, marking a four-month decline since inflation outpaced wage growth, especially following the cessation of energy subsidiesWhile the Bank of Japan anticipates ongoing increases in wages reflecting economic recovery and an improved labor market, the decision to raise interest rates remains contingent on various factors, including the implications for the economy and financial markets.

Investors are also turning their attention to South Korea's stock market, which, despite recent rebounds, faces volatility leading to heightened interest in U.S

marketsData indicates that by the end of 2024, South Korean investors’ holdings in the U.Sstock market surged to a record $112.1 billion, marking a 65% increase year-on-yearThe political turmoil within Korea may further propel retail investors away from local equities.

The challenges ahead for South Korea's stock market are considerableUncertainties in the global economic landscape continue to loom, with changes in U.Seconomic policy and trade disputes likely to affect South Korea's exports and economic growth, consequently impacting the stock marketAdditionally, the need for structural adjustments and enhancing competitive edges in critical industries like semiconductors and automobiles remains a daunting taskFailure to innovate and elevate competitiveness may hinder corporate profitability and market performance.

Moreover, the stability and sustainability of government policies are crucial