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ASEAN Investment Outlook 2018 December 29, 2017
We offer some investment ideas and our take on financial markets for the year ahead
Author : iFAST Research Team


ASEAN Investment Outlook 2018

We offer some investment ideas and our take on financial markets for the year ahead

1. Malaysia’s 2018 Outlook

Economic Growth Momentum Is Likely To Sustain

  • After three quarters of above expectation GDP growth, several domestic and international organizations such as RAM Ratings Agency, Malaysia Institute of Economic Research, World Bank and International Monetary Fund have upgraded Malaysia’s GDP growth for 2017.

  • Consumer spending is likely to further improve as they are believed to have acclimatized to the GST system implemented in 2015 and the removal of cooking oil subsidy.

  • Several proposals mentioned during Budget 2018 is likely to improve the average household disposable income which might subsequently lead to higher private consumption.

  • Government spending is likely pick up prior to General Election 14, underpinned by recovering crude oil price which may subsequently lead to higher revenue for Malaysian government.

Robust Growth In Manufacturing Sector

  • Manufacturing sector as one of the drivers for Malaysia’s Industrial Production Index posted a healthy YTD growth of 6.1%.

  • Both manufacturing sales and Purchasing Manager index are suggesting a strengthening manufacturing sector.

  • The local manufacturing sector which accounts about 23% of Malaysia total GDP, is likely to continue its strong momentum underpinned by the external demands, especially from the E&E sectors given the recovery in Technology industry that might drive the demand on semiconductor products.

Improving International Reserve To Counter External Uncertainties

  • Thanks to the surge in local exports and the introduction of new FEA rules back then in late 2016, Malaysia’s international reserves have strengthened and surpassed the US$ 100 billion level.

  • According to the central bank, the current reserves level is sufficient to finance 7.5 months of retained imports and currently stands at 1.1 times of the short-term external debt.

  • This will translate to a stronger ability to weather external uncertainties.

The continuation of Earnings Upward Revision Trend

  • After several years of earnings downward revision, we have finally seen earnings being revised upwards in 2017.

  • Corporate earnings are likely to continue its momentum next year underpinned by strengthening external demand and recovering local consumption that might drive the local economic activity.

  • As of 20th December 2017, the P/E ratio for Malaysia’s equity market stands at 16.2x and 15.3x for 2017 and 2018.

  • Given the slight premium valuation for Malaysia’s equity market, earnings growth would be the major contributor to equity return, which is expected to come in at mid-single digit by end of 2018 – earnings growth for 2017 & 2018 are 6.5% and 6.8% respectively.

Limited Downside For Ringgit

  • We continue to see limited downside risk for Ringgit given the improving local economic condition which may lead to better valuation for various asset classes.

  • Accelerating foreign direct investment and the implementation of new FEA rules are likely to further enhance the demand for Ringgit.

  • Investors with foreign exposure should be cautious of possible FX losses should MYR strengthen from the current level.

2. Thailand’s 2018 outlook

Agriculture Growth to Remain Supported into 2018

  • Agriculture sector has experienced strong recovery in 2017 post El-Nino recovery, albeit helped by low-base effect;

  • Moving into 1H2018, Nino’s index strength is expected to remain neutral or at weak La Niña condition, which portrays a favorable weather for the agriculture sector;

  • Various water rationing projects that have been initiated in the recent two years should also provide a cushion to the drought season in between May and August;

  • While weather conditions remain supportive of crop yields, we expect the low-base effect to wane off, leading to a moderation in agriculture’s growth figure in 2018;

  • Nevertheless, better crop yields and stable commodity prices should continue underscore farmers’ income in the coming quarters, which bodes positively with private spending.

Private Spending to Pick-up Favorably in 2018

  • The end of the Thai King’s funeral marked the end of the year-long mourning period;

  • The modest pickup in private spending in 2017 could be attributable to high household debt, we believe the year-long mourning period may have affected spending appetite as well, given the significance of the late King to the people;

  • Thailand’s household debt to GDP ratio has been falling from its peak gradually since 2H2016, which indicates that Thais may have been paring down on their debts as their incomes improves from the pickup in agriculture and tourism activities;

  • A lower household debt, modest inflation together with the end of the year-long mourning period may point towards a stronger private consumption spending into 2018.

Newly Approved Investment Budget a Boost to Growth

  • The Thai cabinet has recently approved an investment budget that is more than 40% higher than fiscal 2017 that goes largely (>40%) into infrastructure and logistics projects;

  • These projects include expansion of utilities pipeline, airport facilities, as well as the on-going railway projects;

  • More importantly, the cabinet has also granted permission to the state planning unit (NESDB) to adjust the investment budget and monitor strictly on the progress of budget disbursement;

  • These measures should improve the institutional efficiencies between operation and regulation functions of the state enterprises, which may in turn lead to improvement in budget disbursement.

Valuations – Ball and Chains for Thai Equities

  • The market has been pricing in a political premium for Thai equities, as the approved constitution in 2016 depicts an end to many years of economic and political stability;

  • Thai’s economy has also been riding on the current tide of global economic recovery, witnessing robust exports growth and enjoying higher prices for commodities and agriculture products;

  • PE ratios for 2017 and 2018 stood at 17.5X and 15.7X, compared to a fair PE of 14.0X (as of 22 December 2017);

  • 2017 and 2018 earnings growth currently stood at 3.2% and 11.3% respectively (as of 22 December 2017);

  • While the SET Index is susceptible to valuation contraction, given the ameliorating macroeconomic condition, earnings growth should remain supported, which may underscore Thai equities’ performance moving forward.

3. Indonesia’s 2018 outlook

Economy outlook continues to be positive

  • World Bank has projected that the Indonesia economy would grow at 5.3% while IMF sees Indonesia’s annual growth rate at 5.2% in 2018. Despite the underwhelming GDP growth figures in 1H 2017, Indonesia’s growth prospects remain bright. We continue to affirm our outlook that Indonesia’s economic growth will improve in 2018.

  • Investment is forecasted to increase at a faster pace as S&P Global Ratings raised Indonesia’s credit rating to BBB- from BB+. As such, it is likely to see more fund inflows into Indonesia

  • Indonesia’s strong government fiscal position with the removal of gas and electricity subsidies will give a bigger fiscal pocket (higher infrastructure budget) to accommodate Jokowi’s ambitious infrastructure spending and urbanization efforts moving forward

  • Government seeking to boost its revenue collection as it plans to impose excise tax on plastic bags and review other tax policies in 2018 which will provide scope to support growth government revenue.

  • Amid a low inflation and interest rate backdrop, we continue to see solid consumer spending in Indonesia on the back of stronger consumer confidence.

  • Exports is likely to be lifted by stronger external demand in line with faster global economic growth and the rebound in global trade. The growth of exports will also increase economic growth due to improvements in Indonesia’s major trade partners’ economies and rising commodity prices

Private Consumption Growth Showed Tentative Signs of Recovery

  • Private consumption continued to improve in 3Q2017, as household consumption growth remained stable;

  • The recovery trend is consistent with the further easing of inflationary pressures, stable Rupiah, robust labour market and lower borrowing cost;

  • As the impact of the shift in Lebaran month and higher electricity tariffs wanes, private consumption starts to recover in Q3, and should remain on a modest upward path into Q4 and early 2018.

Infrastructure Spending Remain as Government’s Priorities

  • Revision of its state budget in July has increased its fiscal pockets to accommodate more infrastructure spending moving forward;

  • Strong revenue collections from month of January to November has supported higher government spending;

  • Going forward, the 2018 budget sets achievable tax revenue targets, broadly reflects continuity in the government’s priorities on infrastructure spending.

Bank Indonesia Remains Accommodative

  • The central bank of Indonesia viewed their monetary policy as adequate to maintain inflation within their expectation, after slashing rates for two-consecutive months in August and September to lift economic growth;

  • We foresee easing measures to stimulate lending and investment activities on the domestic front.

Valuations – Remain at slight premium

  • Investor’s appetite for Indonesian stocks can be explained by optimistic views of the Indonesian economy, with GDP growth expected to accelerate, low inflation and expectations of more government spending in the years ahead;

  • As of 27 December 2017, earnings estimates for JCI Index in 2017 and 2018 have been revised by -1.4% and -0.8% respectively;

  • PE ratios for 2017 and 2018 are currently standing at 17.5 and 18.0 as of 27 December 2017;

  • Valuations for Indonesian equities are still trading at slight premium at this juncture;

  • While earnings growth remains a major driver to the potential returns within the Indonesia’s equity landscape, the annualized expected return may be susceptible to the compression of PE ratios.

Takeaway

We continue to have a positive view on the Malaysia equity market underpinned by improving fundamentals of the local economy. Given the expectation of stronger corporate earnings and a better economic backdrop, the local stock market is expected to deliver a rather reasonable return for investment horizon over the next 3 years on a relative basis. For investors who wish to gain exposure into the local equity market, they can look into Kenanga Growth Fund or Eastspring Investments Equity Income Fund. Investors who are looking to tap into these economy growth opportunities, they can consider InterPac Dana Safi, InterPac Dynamic Equity Fund and KAF Vision Fund which are investing into the small cap space.

In other ASEAN markets, namely Thailand and Indonesia, the robust exports figures coming from both nations support that the global economic recovery picture remains intact, and continues to benefit exports-reliant economies such as the ASEAN nations. We are of the opinion that both nations’ economic outlook continues to be favourable as the conducive external environment persists and domestic conditions becomes healthier. As such, for investors who share the same view with us, they can consider ASEAN funds that are available in our platform. For investors who are seeking higher equity market returns can consider Asian equities, which are still offering compelling value and higher expected upside at this juncture.

Looking for more ideas? Check out our latest Key Investment Themes and 2018 Outlook!


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