Mr. Alan Tan, who heads the South East Asia Equity team at Lion Global Investors, shares his views on the outlook for the region’s equity sector this year.
Where do you think Southeast Asian equities are headed in 2012?
We expect the South East Asian (‘SE Asian’) market to head higher this year, although it is not likely to perform as well as the North Asian markets. Still, the rising middle class households, strong commodity prices and rising private consumption should see SE Asia enjoy economic growth in 2012.
We do not expect a sharp slowdown in the region as our base case does not include a global recession. On the whole, SE Asian markets are relatively more resilient than their neighbours as they are less leveraged to exports to developed economies (with the exception of Singapore) and have the fiscal strength to do pump priming. The experience in the 2008/2009 Global Financial Crisis has proven so.
SE Asian central banks have embarked on a series of rate cuts and monetary easing. What signals are they sending to investors?
The rate cuts implemented by the region’s central banks show firstly, the strength of the SE Asian countries’ foreign exchange reserves and balance sheet, and secondly, their intention to sustain domestic growth. It is also an indication that they do not view inflation as a concern anymore.
What are the implications of Indonesia’s sovereign debt rating shifting to investment grade by Moody’s amidst the European crisis? How can investors benefit from Indonesia’s rise?
The upgrade is good for Indonesia, as it puts the nation back on the radar screen of conservative fund managers whose mandate allows them to invest only in equities or bonds of countries that are rated investment grade.
In the immediate term, the yields on Indonesian sovereign rates have fallen as investors accumulate its sovereign bonds. The 10-year yields have fallen by more than 60ps from the announcement of the upgrade on 18 January 2012. We believe the upgrade by Moody’s will benefit Indonesia, as well as those invested in Indonesia) as the cost of funding will fall. At the same time, accessibility to funding will become easier as more investors can now invest in Indonesia.
For the moment, we do not expect sovereign upgrades for other countries in the region, for the immediate future.
Closer to home, what is the outlook for Singapore equities?
We are positive on Singapore equities for the year. Valuation is attractive, trading at one standard deviation below the historical average (1996 to Jan 2012) of 15.5 times. This scenario becomes even more compelling if you couple it with the fact the market was sold down aggressively last year as investors reduced risk, and as investors become more bullish as the global economy, especially the U.S., is showing some signs of stability.
Which sectors -- on the Singapore bourse and among Southeast Asian bourses -- are you most positive about?
For the Singapore market, we are positive on the offshore marine and the agriculture commodity sectors.
Among the SE Asian bourses, we think the Thai market looks interesting as it has the lowest valuation among the other SE Asian markets and the reconstruction spending, post the floods, will underpin economic growth this year.
Lastly, what are the key risks facing Southeast Asian equities in 2012?
The risks facing the region can be summarized as follows:
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