Investment Adviser:

CIMB-Principal Asset Management

(Singapore) Pte. Ltd.

(March 2015)

Some ASEAN markets had very good returns last year, up to 22% for Philippines and Indonesia. What was this positive performance down to and are those same factors likely to help deliver similar performance in 2015?


The strong performance for these markets can be viewed as a reversion to the mean after the sharp falls seen in 2013. Remember that countries like Thailand, Indonesia and Philippines were the worst performers in 2013 given US Federal Reserve tapering concerns. By the start of 2014, valuations had become more reasonably attractive and Thailand was viewed as being the cheapest. Indonesia received a boost in 2014 from the election of Joko Widodo as its next President.


Malaysian equities were among the poorer performers though, closing the year down. Was much of this down to the oil price falls or is there something more fundamental behind the negative performance?


For Malaysia, more recently the underperformance has largely been related to the decline in oil prices. But Malaysia has actually been underperforming the region (MSCI Asia ex-Japan) since mid-2013.This can be attributed to slowing Return On Equity (ROE). For 2014, Malaysia had the second worst Earnings Per Share downgrades (after Korea) in the region. Malaysia continues to underperform given the weakening ROE and limited room for Cost Of Equity (COE) to fall as real short rates are close to zero. If oil and commodities stabilise as they appear to be doing currently, the underperformance is likely to be smaller.


Would continuing low oil prices have any major effect on other economies, and subsequently stock exchanges, in the region or is it really something only Malaysia has to be particularly concerned about?


Lower oil prices are clearly positive for net energy importers such as Thailand, Philippines, Singapore, Korea, Taiwan and India. The net impact on Indonesia should be roughly neutral with a negative impact from low prices for non-oil and gas commodities offsetting the benefits from lower oil prices. Malaysia is particularly vulnerable to lower oil prices as it is viewed as an oil exporter.


The election of reform-minded Joko Widodo as Indonesian president last year was greeted enthusiastically by investors. Is that enthusiasm still there and how much progress has been made on reforms there?


The Jokowi administration has started to find a second wind in terms of investor confidence as it has shown the ability to deregulate fuel prices and push the current proposed budget to increase infrastructure spending. That said, this round of optimism will not be as great as it was right after the election, which might be a good thing given that the enthusiasm then was based on unrealistic expectations. Now that the constraints are well known, Jokowi will have to deal with a minority in parliament, at times obstructionist opposition, and may not always have 100% support from his own political party, the PDI-P. But given that he has used presidential authority to push ahead difficult economic reforms like removing (the large bulk of) fuel subsidies very early on, investor sentiment remains positive.


What reforms do you think are most crucial for the Indonesian economy and, directly or indirectly, its markets?


Reforms that allow the economy to diversify towards more labour-intensive manufacturing and services, and to reduce its reliance on commodities. This will require not only infrastructure investment in power and logistics but also improvement of ‘soft infrastructure’ via cutting red tape, simplifying customs regulations, opening up of Foreign Direct Investment, and generally improving the business environment. President Jokowi seems to be the right man for this type of job as far as we understand but that would not mean that these things can get moved overnight for the reasons stated above. So far we have seen President Jokowi trying to establish a “one-stop shop” for getting investment licences and tackling ports congestion, but the outcomes are yet to be seen.


Are there any other states in the region where planned reforms, or a lack of them, are likely to be major factors in market performance this year?


Thailand is one country that comes to mind. Its aging population, shortage of skilled labour and low investment have already started to erode Thailand’s potential growth rate which will then have negative implications for stock markets and currency (in the long run). It is facing the classic middle income trap and will need significant reforms to maintain the 4-5% per annum growth rate which it has seen in the past.


Many analysts see slowing global growth and, in particular slowing economic growth in China, as a concern for the ASEAN region. Would you agree with this?


Yes. China is slowing and consensus is that it is slowing faster than official numbers suggest. Asia’s export growth has been mixed and uneven, partly because of China’s slower growth. China is Asia’s largest export destination, having overtaken the United States several years ago. Firmer Asian exports to the United States are helping to offset weaker exports to China and Japan.


Slowing Chinese growth is far from something new though, surely markets have priced this in by now?


We do not believe that markets have fully priced it in. Growth may continue to slow owing to deep-seated domestic challenges such as the property market correction and tighter controls over local government debt and deleveraging.


While the European Central Bank (ECB) has just announced QE for the Eurozone, interest rates in the US are expected to normalize soon. What effect are both these likely to have on ASEAN stocks, if any, and will they only be short term?


Historically, the ASEAN region has underperformed (as in 2013) when bond yields rise but expect only a muted rise when the Federal Reserve starts to hike interest rates. This may be offset to some degree by the ECB’s QE exercise.


This year should see the inception of the ASEAN Economic Community (AEC). Could you tell us something about this organisation and what will it mean for ASEAN economies, markets and investing in the region?


AEC is a blueprint and not an agreement so technically each country can keep postponing the implementation of these liberalization measures. If AEC is implemented in full then everyone will benefit. For example, Singaporean, Malaysian and Thai firms will find it easier to invest in the region. Philippines and Indonesia could get more Foreign Direct Investment and intra-regional trade would increase significantly due to the simplification of custom rules. However, in the near term, Thailand is probably the best positioned to gain from tariff reductions by Laos, Vietnam, Myanmar and Cambodia, given the already significant trade with these economies.


The AEC’s inception has already been put back once and there are some doubts that all its proposed member states will be ready for it by the end of this year. Are you confident it will go ahead as planned?


We see the AEC as an ongoing process that will continue well past 2015 and doubt that most of the agreements can be implemented this year. Only tariff reductions within the LVMC (Laos, Cambodia, Myanmar and Cambodia) countries are more realistic than others.


What do you see as the prospects for the ASEAN region and its markets in the next six months?


Most economies will see rapid disinflation, allowing central banks to turn more dovish, but growth will continue to be disappointing in most places, and especially Malaysia which is most vulnerable to commodity downturns. Prospects in the Philippine economy remain positive, largely due to lower oil prices and its strong export performance. Indonesia and Thailand will experience headwinds from tighter fiscal policy (subsidies cuts) in the near term before planned infrastructure spending probably feeds into the economy in the second half of the year.

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