Indonesia’s stocks are among JPMorgan Asset Management and Goldman Sachs’ top picks for 2022. A statue of a bull stands in the lobby of the Indonesian Stock Exchange (IDX) in Jakarta, Indonesia in this April 2019 photo.
Dimas Ardian | Bloomberg via Getty Images
Geopolitical tensions around the world have increased, but Southeast Asian markets could offer investors relative safety, according to leading investment banks.
As we head into the next quarter of 2022, CNBC asked analysts from Goldman Sachs and JPMorgan Asset Management which Southeast Asian markets were their top picks.
Southeast Asian equities have underperformed and have been “largely ignored by global investors for a decade,” said Timothy Moe, Goldman’s chief strategist on Asia-Pacific equities.
Indonesia is a top choice in Southeast Asia for both Wall Street banks.
“In Indonesia, we are structurally positive about the banks, since the majority of the population still has no or only an insufficient bank account. We are currently positioned in leading private sector and also state-owned banks as they proactively drive digital adoption to accelerate financial penetration,” said Desmond Loh, portfolio manager at JPMorgan Asset Management.
Strong commodity prices have also had a positive impact on Indonesia’s export earnings and the country’s trade balance, which should support development Indonesian rupiah and the near-term growth prospects in Indonesia, he said.
Global commodity prices have been on a rollercoaster ride since war broke out in Ukraine following the Russian invasion in late February. Russia is a major oil producer Ukraine is a major exporter of other commodities like wheat and corn.
From Monday morning in Asia, international benchmark Brent Crude Oil Futures are up more than 30% so far this year.
JPMorgan Asset Management also likes Vietnam, which Loh described as a “star performer in recent years” in terms of economic resilience and growth. Vietnam is one of the few economies worldwide to have seen positive economic growth during the pandemic, he added.
“To benefit from the growth, we are positioned in quality consumer representatives and banks,” he said, without naming specific stocks.
Meanwhile, Singapore is the other Southeast Asia that Goldman Sachs likes.
There are three main reasons the investment bank likes both Indonesia and Singapore, Moe said.
- Improving economic and growth momentum in a region that is belatedly recovering from Covid-related setbacks.
- A banking sector heavily weighted in equity indices that will benefit from a move to tighter monetary policy and rising interest rates.
- The “gradual emergence” of digital economy companies being included in the indices of Indonesia and Singapore.
In comparison, MSCI’s broadest index of Asia-Pacific stocks outside of Japan is down 6%.
Investors have grappled with a range of concerns over the past few weeks, from commodity price hikes sparked by Russia’s invasion of Ukraine to one environment of rising interest rates than big central banks like the US federal reserve trying to fight inflation.
Southeast Asia is “relatively isolated” from rising geopolitical tensions in Europe, with Russia and Ukraine accounting for less than 1% of regional exports, according to Loh.
“The escalation of geopolitical risks is providing short-term tailwinds for commodity prices to underpin the strength of commodity exporters in ASEAN markets,” he said, referring to the 10-member Association of Southeast Asian Nations.
Global investors have repositioned themselves in recent weeks in anticipation of more aggressive moves from the US Federal Reserve’s monetary tightening, but analysts expect the impact on Southeast Asia to be relatively less than historically.
In March the Federal Reserve Rate hikes for the first time since 2018and Fed Chair Jerome Powell subsequently pledged take tough action against inflation that is “much too high”.
The prospect of further rate hikes by the Fed has raised concerns about capital outflows and currency depreciation in emerging Southeast Asia, a phenomenon witnessed during the 2013 “taper tantrum” when bond yields shot up after the Fed indicated that the Security purchases could slow down.
“We do not expect an exodus of drains [from ASEAN] as we saw in the last taper tantrum,” Loh said, explaining that country-level balance sheets in Southeast Asia are now “generally much healthier” than they were a decade ago.
Most of the central banks of Southeast Asia, with the exception of Singapore, still need to tighten monetary policy. This is partly due to a regional inflationary situation that is relatively less severe compared to the developed economies in the west.
Southeast Asian economies are more resilient today compared to previous cycles, Moe said, citing better external balances and attractively valued currencies.