Global investors are showing heightened interest in Southeast Asian assets as the possibility of interest-rate reductions and appealing valuations offer the potential for significant returns. In the last two months, fund managers have increased their holdings in government bonds from Thailand, Indonesia, and Malaysia, while also being net purchasers of equities from Indonesia, Malaysia, and the Philippines for the past three months. These inflows have contributed to Southeast Asian currencies outperforming other emerging markets this quarter, with regional stocks surpassing their EM counterparts by a wide margin.
Southeast Asian central banks are on the verge of embarking on a cycle of interest rate cuts, with the Philippines already easing in August and Indonesia expected to follow suit this week, according to some economists. Real interest rates in the region, which factor in inflation-adjusted borrowing costs, are currently at historically high levels, providing ample room for policy adjustments.
Joevin Teo Chin-Ker, the head of investment at Amundi Singapore Ltd., expressed optimism about Southeast Asian bonds and currencies in the medium term, especially in countries offering higher yields. He highlighted that real interest rates in Southeast Asian economies are higher compared to a year ago, indicating potential for easing that could benefit the local bond market.
BlackRock Inc. is planning to capitalize on any market volatility this month to purchase bonds in Asian nations like the Philippines and Indonesia, anticipating that rate cuts from the Federal Reserve and regional central banks will boost the region’s debt market. Neeraj Seth, the head of Asian fundamental fixed income at BlackRock in Singapore, emphasized their preference for medium-to-long-term maturities in these countries due to the greater flexibility of their central banks in implementing monetary policies.
Additionally, Southeast Asian currencies are perceived to be undervalued based on the mean of real effective exchange rates in the region, which is 1.8% lower than the 10-year average. This contrasts with Latin America and Europe, the Middle East, and Africa, where exchange rates appear either overvalued or above historical averages. Southeast Asia is also poised to benefit from “friend-shoring,” a trend where countries opt to conduct business with political allies, as investors seek alternatives to potential trade disputes between the US and China leading up to the upcoming US presidential election.
Deutsche Bank AG’s private banking arm’s Asia Pacific chief investment officer in Singapore, Stefanie Holtze-Jen, underscored Southeast Asia’s favorable demographics and proximity to key markets like China and India, positioning the region well for the ongoing global shift towards diversifying manufacturing and sourcing away from China.
