Are equities in South East Asia a real bargain now?

The global rout of stock markets across the world since May 22, 2013 started when US Federal Reserve (Fed) Chairman, Ben Bernanke, hinted that monetary policy makers may start to taper its USD 85.0 billion a day Quantitative Easing (QE) programme sometime during the second half of 2013 is just starting to ease leading up to the upcoming conclusion of the Fed monetary policy meetings scheduled for June 19, 2013 (New York time). The combination of Fed talk on tapering, together with news out of China on its latest HSBC Purchasing Managers Index (PMI) which shows a contraction, and Bank of Japan (BOJ) staying pat regarding its further intervention of the Japanese Yen currency last week have resulted in the spike in the volatilities across major stock indices around the world, including the Jakarta Composite Index (JCI), the Philippine Stock Exchange Index (PSEI), etc.

Interestingly, when Asian markets opened for trading on June 17, 2013, there has been quite a significant turnaround, barring any unexpected announcement of any major changes to the monetary policy statement coming from the US Fed on June 19. Equity market valuations have turned relatively cheap after last week’s massive sell-off, and fund managers/investors are starting to move into the market, buying well undervalued assets, including equity investments, commodities, etc.

In a news article published on June 19, 2013, it was reported that one of the top Indonesian pension funds group, PT. Jamsostek (Jamostek) indicated that after last week’s global sell-off of assets, the manager is starting to see opportunities in its attempts to bolster its equity holdings, along with some optimism about the potential economic growth in Indonesia. This announcement comes as many fund managers are starting to return to the markets, seeking for bargain equities, noting the relatively oversold markets seen recently. The announcement also comes in the wake of the government’s end of fuel subsidies put in place since 2008, and the Bank of Indonesia (BI) surprising rate hike last week, which is seen as a move to strengthen the Indonesian Rupiah currency, and bolster its foreign currency reserves, as a result of its various past interventions to shore up the Rupiah.

According to the June 19 Bloomberg news article, Jamsostek President Director, Elvyn Masassya said in a June 17 interview that the fund is projecting the JCI to reach approximately 5,000 levels by the end of 2013, compared with 4,840.45 as of market close on June 18, 2013. This represents an expected increase of approximately 3.3 percent. However, Jamsostek is still waiting for the JSI to return to its bargain levels averaging between 12.0 to 13.0 times earnings, as compared to the current valuation of approximately 14.0 times. In the same article, it was also revealed that Jamsostek’s investments in equities have returned 33.5 percent during the first five months of 2013, outpacing the approximately 17.0 times seen for the JSI. The Indonesian government has forecasted its Gross Domestic Product (GDP) to show an expansion of approximately 6.3 percent for 2013, which was quite an optimistic figure as compared to an average of 2.2 percent pace as forecasted by a group of analysts Bloomberg has estimated earlier.

On the same day when the news article on Indonesia was published, the global financial news bureau reported that many managers are starting to see the Philippines’ equities turning cheap in terms of its relative valuation. The PSEI was trading at approximately 18.0 to 19.0 times earnings before the recent global market sell-offs, but has since come back down. Local financial institutions including BDO Unibank, Inc. (BDO), and Metropolitan Bank & Trust Co. (MBT) indicated that they are expected to switch out of fixed income to place higher percentages of its portfolio mix into equities. This move is quite similar to many pension fund managers around the region, including South Korea and Japan moving out of fixed income and into equities. The Philippines economy is expected to expand at a faster-than-anticipated pace of 7.8 percent, more than China’s 7.7 percent, and it comes at a time when the credit ratings agencies such as Standard & Poor’s (S&P), Moody’s and Fitch Ratings have upgraded the country’s long-term economic outlook and sovereign debt ratings.

With the across-the-board recovery seen in these two South East Asian markets, Thailand, and others, it remains to be seen whether South-East Asian equities are still relatively cheap as compared to their American and European counterparts which are averaging at approximately 12.0 times to 13.0 times earnings. The QE programme launched since 2009 by the US Fed, combined with the so-called Yen carry trades have been providing much of the boost to markets across the region and Asia upwards, prompting responses by various monetary authorities to step up their monitoring and/or attempts to temper the amount of capital inflows into their respective financial systems. Given the volatilities seen recently, it is still early to tell whether fund flows into South East Asia, particularly Indonesia, the Philippines, and Thailand will be sustainable. The recent market moves have been in anticipation of the outcome of the Fed monetary policy meetings on June 19, 2013. Although several analysts have spoken out on the expected moves by the US Fed on June 19 indicating that there might not be any major changes to the monetary policies implemented, including its ongoing QE programme of asset purchases, investors do need to consider the eventual end of QE programme, and how the US Fed will likely conduct the monetary policies by the end of 2013 and next year, as the US economy starts to pick up.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc