Indonesia’s shares are among the top picks of JPMorgan Asset Management and Goldman Sachs for 2022. This April 2019 photo shows the statue of a bull at the lobby of the Indonesia Stock Exchange (IDX) in Jakarta, Indonesia.
Dimas Ardian | Bloomberg via Getty Images
Geopolitical tensions around the world have been on the rise, but the markets of Southeast Asia may offer relative security to investors, according to top investment banks.
As we enter the next four years of 2022, CNBC analysts from Goldman Sachs and JPMorgan Asset Management asked 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 Asia Pacific equity strategist.
Indonesia is a top Southeast Asian choice for both Wall Street banks.
Indonesia: Banking and Commodity Plays
“In Indonesia, we are structurally positive about the banks, because the majority of the population is still unbanked or underbanked. We are currently placed in the leading private sector as well as state banks, because they have sent proactive digital adoptions to accelerate financial penetration, “said Desmond Loh, a portfolio manager at JPMorgan Asset Management.
Strong commodity prices have also been favorable for Indonesia’s export earnings, such as the country’s trade balance, which is set to support the Indonesian rupiah, as well as the short-term growth prospects in Indonesia, he said.
Global commodity prices have been on a rollercoaster ride since the war broke out in Ukraine following the Russian invasion in late February. Russia is a major oil producer, while Ukraine is a major exporter of other goods such as wheat and corn.
As of Monday morning in Asia, the international benchmark Brent crude futures has increased more than 30% so far this year.
Vietnam and Singapore
JPMorgan Asset Management also loves Vietnam, which Loh has called a “star performer” in recent years in economic resilience and growth. Vietnam is one of the few economies worldwide that has seen positive economic growth in the entire pandemic, he added.
“To take advantage of the growth, we are positioned in high-quality consumer proxies and banks,” he said, without naming specific stocks.
Meanwhile, Singapore is the other Southeast Asian that Goldman Sachs likes.
There are three main reasons why the investment bank of Indonesia holds as well as Singapore, Moe said.
- Improving economic and growth momentum of a region that is recovering too late from Covid-related setbacks.
- A banking sector that is heavily weighted in stock indices and set to benefit from a shift to tighter monetary policies and rising interest rates.
- The “slow rise” of digital economy companies listed in Indonesia and Singapore indices.
Indonesia’s Jakarta Composite has grown more than 7% this year, while Vietnam’s UN index has risen about 1% over the same period. The Singapore Straits Times Index has risen more than 9%.
In comparison, MSCI’s broadest index of shares in Asia-Pacific outside Japan fell 6%.
On Wall Street, the S&P 500 has fallen 4.6% so far this year, while the pan-European Stoxx 600 has fallen about 6%.
Investors have been grappling with a variety of concerns in recent weeks, from the peak of the commodity price triggered by Russia’s invasion of Ukraine to a growing interest rate environment as large central banks such as the US Federal Reserve try to combat inflation.
Shelter against geopolitical tensions
Southeast Asia is “relatively isolated” from growing geopolitical tensions in Europe, as Russia and Ukraine account for less than 1% of regional exports, according to Loh.
“Escalation in geopolitical risks in the short term makes the wind for commodity prices to support the strength of ASEAN’s commodity exporter markets,” he said, referring to the 10 member states of the Association of Southeast Asian Nations.
No ‘exodus or outflows’ expected
Global investors have been repositioning in the last few weeks in anticipation of more aggressive movements ahead due to the Federal Reserve’s monetary tightening, but analysts expect the impact on Southeast Asia to be relatively smaller compared to earlier.
In March, the Federal Reserve raised interest rates for the first time since 2018, and Fed Chairman Jerome Powell promised to take tough action on inflation that is “far too high.”
The prospect of more rate hikes ahead by the Fed has raised concerns about capital outflows and currency depreciation in emerging markets in Southeast Asia, a phenomenon seen in 2013 during the “taper tantrum” that saw bond yields spike after the Fed suggested that purchases of assets could decrease.
“We do not expect an outflow of outflows [from ASEAN] as we saw in the last taper tantrum, “Loh said, explaining that land-level balance sheets in Southeast Asia are” generally much healthier “now compared to a decade ago.
Most of the central banks of Southeast Asia, with the exception of Singapore, have yet to tighten monetary policy. This is due in part to an inflationary situation regionally that is relatively less severe compared to developed economies in the West.
Southeast Asian economies today are also more resilient compared to past cycles, according to Moe, which cites external balances that are in better shape, such as currencies that are attractively valued.