Despite a recent resurgence in Covid-19 cases in the region, UBS remains upbeat on Asean’s chances. “Although the Covid-19 pandemic has disrupted economies, Asean economies continue to provide investment opportunities,” says Yeoh Choo Guan, head of Asean global markets at UBS.
Speaking at a media roundtable on June 10 ahead of UBS’s OneAsean investment conference, Yeoh is confident that the momentum in Asean markets will continue to grow in the second half of the year and beyond.
“[Deal] flows in capital markets have been active despite the pandemic as Asean can provide cyclical tailwind into next year for investors,” she adds.
Asean equities, in particular, remain a key focus amongst investors. In the last year, the FTSE Asean All-Share Index — which tracks a selection of large, mid and smallcap Asean companies from Indonesia, the Philippines, Vietnam, Malaysia, Thailand and Singapore — has increased more than 20% as economies started recovering from the brunt of the pandemic.
While this is less than the growth seen in US equities or other Asian markets like China or South Korea, Yeoh asserts that the region continues to see heightened interest from both retail and institutional investors, complemented by a steady increase in domestic investors.
Vaccines and external demand to support Asean growth
UBS’s bullishness on Asean equities corresponds with an optimistic economic outlook for the region. Edward Teather, UBS’s senior Asean economist, believes that the right ingredients are in place to support positive growth for Asean in 2H2021 and 2022.
Underpinning this view is the expectation that large-scale vaccinations will accelerate in the coming months. “We believe that the ongoing positive news flow on vaccines and the implications for longer-term prospects will likely provide support to investor, business and consumer confidence in Asean,” he says.
While the roll-out of vaccination programmes in Asean countries to date has lagged behind developed nations like the US and the UK, Teather says the governments in the region are targeting a clear acceleration in vaccination rates in the coming months.
Leading the pack is Singapore, which aims to get half its residents fully vaccinated by August, and at least 75% by October. As of June 7, about 30% of the population is fully vaccinated.
Neighbouring Malaysia has also stepped up its vaccination programme, with over 150,000 vaccine doses now administered daily, with plans to bump this up to 250,000 doses per day by mid-July. The country is aiming to have 80% of its population vaccinated by the end of the year, a steep jump from the current 4%.
Teather also points to similar vaccination targets being implemented in Indonesia, Thailand and the Philippines. While vaccine supply issues have affected Asean countries, he expects this to be adequately resolved by 2022.
Greater exposure to global trade
Earlier this month, Thai drugmaker Siam Bioscience — a company owned by the king of Thailand — started the production of AstraZeneca vaccines, which will be distributed across Southeast Asia.
Despite the near-term drag caused by the ongoing Covid-19 situation, Teather says Asean growth continues to be supported by the sustained demand for its exports. Exports have continued to show strong growth y-o-y going into 2021, which Teather says is not just attributable to the low base in 2020. “[Data shows] that not only has export growth been strong, but it’s been consistently and surprisingly strong as well,” he adds.
Countries with open economies that have greater exposure to global trade, including Singapore, Malaysia and Thailand, achieved surprise upsides in real GDP in 1Q. The strength in trade has also corresponded to a rebound in investments by Asean countries, as seen through a pick-up in the import of capital goods across Malaysia, Indonesia and Thailand.
Both factors should prime Asean to ride the recovery in tourism, a major thruster for its economies, as widespread vaccinations are achieved and movement restrictions get relaxed. Teather says that the Asean-5 countries — Singapore, Malaysia, Indonesia, the Philippines and Thailand — collectively earned some US$30 billion ($39.8 billion) per quarter on travel service exports prior to the pandemic, totalling roughly US$120 billion per year. “A recovery to just a third of that would be worth 1.4% or so of Asean-5 GDP, in terms of additional income and spending power,” he adds.
To that end, Teather is forecasting Asean to outperform US and Europe in terms of real GDP growth going into 2H2021 and into 2022 as vaccinations gain traction.
Supporting the positive outlook are the fiscal policies in the region which he expects to remain accommodative for the rest of the year as central banks look to support economies through the current uncertainties.
“Deficits are expected to remain wide this year, with the exception of Singapore — and even in Singapore, the actual fiscal impulse to the economy, when you think about the sorts of policies that are being pursued and the lags involved, is likely to be still positive this year,” he says.
While inflation has jumped up this year for certain Asean countries, he does not anticipate this to exceed the comfort zones of central banks, allowing for continued dovish policies.
Looking ahead, Teather concedes that policies will likely shift in the coming year. With the US Federal Reserve expected to announce tapering in asset purchases by end-2021 and the People’s Bank of China commencing monetary tightening earlier this year, he believes Asean central banks will likely start normalising in due course. While Teather anticipates fiscal consolidation to begin in 2022, this will potentially be at a slower pace than initially expected.
Eyeing recovery plays
Given the sanguine economic outlook, UBS remains positive on Asean equities. “Within Asean equities we are overweight [on] Singapore, the Philippines and Indonesia,” says Ian Douglas-Pennant, UBS’s head of Asean research.
He is confident that the rapid growth in vaccination rates from 2H2021 onwards will buttress equities, despite the current lockdowns taking place across the region. “The bull case on Asean is very easy to make, because mass rollouts of vaccines in this region have really only just begun,” he adds.
The underperformance of the markets in the first half of the year does not deter his outlook. Douglas-Pennant believes sentiment was largely impacted by investors’ disappointment in Asean vaccine rollouts, which failed to match the deployment rates seen in developed countries.
Boost for Asean equities
However, Douglas-Pennant rationalises that investors’ expectations were misaligned to begin with, as Asean governments have predominantly communicated that mass vaccination rollouts would only begin in earnest in 2H2021.
To that end, he also believes Asean equities will get a boost in the coming months as sentiment improves, and sees reopening plays as the best approach to the market.
“We remain risk-on in the region with a continued preference for sectors that should benefit from regional reopening, global reflation and US stimulus — for example, capital goods, construction materials, and transportation,” says Douglas-Pennant.
Singapore remains among his most preferred markets in view of its position ahead of the Asean pack on vaccinations, as well as its heavy exposure to the recovery in global trade. With real GDP growth expected to hit over 6% for the US and China compared to the normal pace of growth of around 3.5% to 4%, Singapore stands to benefit from a strong pick-up in exports. Domestic activity should also increase as the country emerges from tightened Covid-19 measures.
In any case, Douglas-Pennant is convinced that despite the short-term headwinds being faced by Asean countries, the fundamental outlook for the region remains bright. “What matters to investors at this point is the long term. And what matters for the long term is vaccines,” he adds.
As Asean countries race to achieve herd immunity and catch up with developed markets, investors are ready to ride the upside.
Photo: Bloomberg
