Funds pour into South-east Asia as rate-cut cycle gets underway

Global funds are snapping up South-east Asian assets as the prospect of interest-rate cuts and attractive valuations holds out the promise of supersized returns.

Money managers have boosted positions in sovereign bonds in Thailand, Indonesia and Malaysia for the past two months, and have been net buyers of Indonesia, Malaysia and Philippine equities for three months. Those inflows have helped make South-east Asian currencies the best performers in emerging markets (EMs) this quarter, while regional stocks have easily beaten their EM peers.

South-east Asian central banks are on the brink of a rate-cut cycle with the Philippines already easing in August, and Indonesia forecast by some economists to follow this week. Real interest rates, or borrowing costs adjusted for inflation, are at historically high levels in the region, creating additional room for policy easing.

“In the medium term, we continue to be positive about South-east Asian bonds and currencies, particularly in higher-yielding countries,” said Joevin Teo Chin-Ker, head of investment at Amundi Singapore. “Real rates across South-east Asian economies are also higher than a year ago, which suggests room to ease, a situation likely to benefit the local bond market.”

Indonesia’s real policy rate is currently 4.1 per cent, which is 1.8 standard deviations above the five-year average, suggesting plenty of room to cut rates. The same gauge for the Philippines is 1.5 standard deviations above the five-year mean. That ranks the two countries in the top four of a Bloomberg survey of emerging-markets worldwide, along with India and South Korea.

BlackRock intends to use any volatility this month to buy bonds in Asian countries such as the Philippines and Indonesia in a bet that potential rate cuts by the Federal Reserve and local central banks will bolster the region’s debt.

The money manager prefers medium-to-longer maturities in the two nations as their central banks have more room to ease monetary policies, said Neeraj Seth, head of Asian fundamental fixed income at BlackRock in Singapore.

“It’s a golden age of fixed-income in Asia, specifically the emerging Asian markets,” Seth said in an interview in late August. “It’s a good point to add a little bit more duration” in case of volatility, he said.

Attractive valuations

Valuations also present a positive picture for South-east Asian currencies.

The mean of real effective exchange rates in the region is 1.8 per cent below the 10-year average, signalling the currencies appear undervalued on a trade-weighted basis, data compiled by Bloomberg show. A comparable gauge for Latin America is 2.2 per cent above the five-year mean, while for Europe, Middle East and Africa, it is 4.8 per cent above, indicating overvaluation.

Finally, South-east Asia is seen to be a beneficiary of so-called friend-shoring – a term used to refer to the preference of doing business with political allies. The region is looking increasing attractive as an alternative to China as investors are wary of trade frictions between the US and the world’s second-largest economy in the run-up to November’s US presidential election.  

South-east Asia “should be geared better because of that proximity to China, proximity to India” and the global trend of countries seeking to diversify manufacturing and sourcing away from China, said Stefanie Holtze-Jen, Asia Pacific chief investment officer at Deutsche Bank’s private banking arm in Singapore.

Other positives include friend-shoring, and favourable demographics, she said. BLOOMBERG