Have Southeast Asian financial markets recovered from a general pullback of fund inflows in emerging markets?

Bloomberg News reported on March 20, 2014 that fund inflows into emerging markets in Southeast Asia have been rising, thanks to favourable market conditions, a calm political climate, and others are trying to catch up with the recent tide of foreign fund inflows, which have previously been devoted to other Asian economies, such as China, which has seen its equity markets falling to multi-year lows.

According to the Bloomberg News article, overseas investors have bought up a net USD 1.6 billion worth of shares in three largest Southeast Asian economies, namely Indonesia, Thailand, and Philippines during the month of March 2014, and is starting to catch up to the previous highs not seen since January 2013. This comes as the emerging markets rout which took place during the second half of 2013 that took away nearly most of the returns gained previously as a result of the US Federal Reserve monetary stimulus measures since December 2009. The largest of the fund withdrawals came in fourth quarter when nearly USD 4.2 billion worth of outflows were recorded as fund managers might be rebalancing their investment portfolios or simply ‘window dressing’ as the year end loomed.

The case for the return of fund inflows into these three largest Southeast Asian economies has been predicated to the combination of relative calm political outlook following months of political unrest in Thailand, a shrinking current-account deficit in Indonesia, and slowing inflation in the Philippines. These factors are some of the conditions that might help to cushion the expected acceleration of the US Fed’s monetary withdrawal plans. The equities trading in these markets are estimated to be trading at valuations which are at least 9.0 percent cheaper than their 2013 peaks even climbing to an average of 9.2 percent during the year.

Bank Indonesia (BI) has estimated that the country’s current-account deficit will narrow to 2.5 percent of gross domestic product (GDP) in 2014 from approximately 3.3 percent in 2013, while Philippines’ inflation levels have slowed during the month of February 2014. As for Thailand, foreign investors have bought a net USD 202.0 million worth of equities during the month of March 2014, which was touted as the first monthly inflows since protests started in Bangkok in Oct 31 of last year. Since the lifting of the emergency decree, and the gradual winding down of massive protests in Bangkok, foreign investors have generally been quite receptive about the recent changes in the political scene. Data obtained from Bloomberg News, Thai equities are currently trading at approximately 12.5 times their expected earnings in 2014, down 15.0 times before the US Fed signalled the possibility of monetary stimulus withdrawals in May 2013. The Indonesian gauge’s earnings multiple fell to 15.0 times from its previous high of 16.0 times, while the Philippines stock index fell to 17.0 times from 21.0 times in earnings. These valuations seemed quite low to fairly valued when compared to other developed markets’ multiples which are priced somewhere 15.0 times to 17.0 times expected earnings.

With the inflow of foreign funds into Southeast Asian economies, there are continuing concerns over how governments, securities exchanges, central bankers, and regulators will be able to cope with the so-called ‘hot money’ inflows, while maintaining prudent balance sheets, maintaining healthy, sustainable economic growth conditions, adopting tough oversights on fund inflows, encouraging more foreign direct investments (FDI) which are not considered as highly volatile as compared to money flows, adopting free trade policies that allow free movements of goods and services, among others. There is a need for these economies to continue to work down their current account deficits, adopt tighter budgetary controls, eradicating cases of corruption all across, adopting more open, pro-market policies, and restoring investor confidence in their respective financial markets. These are some of the issues that most Southeast Asian economies might want to look into so as to avoid the repeat of the devastating effects of any fund movements that have a tradition of showing some bouts of volatility due to the short-term nature of such money flows.

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

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

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

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