A strong US dollar poses obvious challenges for most emerging markets, especially those with heavy foreign currency debt. Still, investment experts contacted say most Southeast Asian economies, including Malaysia, remain attractive for their economic growth potential as the world reopens from the pandemic, though things won’t pan out. not without short-term bumps as markets digest a very hawkish stance from the US. Federal Reserve.
Historically, Asean markets have had mixed reactions to the past four periods of strong US dollar cycles since 1980, according to stock market data from the past four decades.
Malaysia has not performed well in all four periods, recording negative returns ranging from 2.4% (June 2021 to May 2022) to 29% (April 2008 to March 2009) (see chart).
Thailand, the Philippines, and Vietnam also suffered losses during almost every period of US dollar strength, with the exception of the period from May 2014 to December 2016, when their markets rose by 8. 5%, 1.5% and 17.5%. From June 2021 to May 2022, Malaysia, Thailand, the Philippines and Vietnam lost 2.4%, 0.2%, 0.2% and 5.7% respectively.
Indonesia, which recorded a gain of 14.7% over the period from June 2021 to May 2022, lost 30.9% over the period from February 2018 to March 2020 and fell 37.6% over the period from April 2008 to March 2009.
Singapore, the only other ASEAN market to post a positive return during the review period of US dollar strengthening, posted negative returns of 46.4% (April 2008 to March 2009) and 27.4 % (February 2018 to March 2020).
Measured year-to-date, the ringgit had weakened 5.8% against the greenback at the time of writing, underperforming other currencies in the region which had eased between 0.8% and 3.1% over the same period.
Yet there may well be opportunities to profit while others are scared.
Regional private equity investor and former dealer Ian Yoong told The Edge it could be a tumultuous ride, with more negative news flow to come – ranging from high inflation and falling fuel costs. energy to global food shortages – weighing on wallets. He advises investors to have a diversified portfolio in terms of sector, currency and geography and believes that clearer skies could only arrive by the second or third quarter of 2023.
Even so, Yoong says Southeast Asia is still the place to invest in the next decade, thanks to excellent demographics with a large young population and good work ethic. Those familiar with the region are also familiar with the countries with higher risks related to politics and economic mismanagement.
Pankaj C Kumar, former head of research and fund manager, agrees that growth momentum and investment opportunities remain abundant in Southeast Asia.
For investors who want exposure outside of Malaysia to avoid single country risk, William Ng, chief investment officer of LeInves PLT, suggests looking for Malaysian companies with exposure to emerging markets such as Indonesia and Vietnam. Some Malaysian manufacturing companies, for example, have set up factories in Vietnam to manage risks, including those related to workers.
While Singapore has always been a top choice when it comes to investing in overseas markets, Ng says its stock market is more suited to long-term investors due to stricter rules and regulations. “The market is dominated by long-term investors with less speculative activity, so it’s less volatile,” he explains.
Although the glove, plantation, furniture and semiconductor industries are seen as beneficiaries of a weak ringgit, Ng points out that factors such as soaring commodity prices and labor shortages work must be taken into account. “In this case, palm oil is the pure export sector, but it seems a bit neutral due to the labor issue.”
The head of a local research house, who requested anonymity, says commodities and finance are the two main investment themes in Southeast Asia. “Commodities are still key for markets like Malaysia and Indonesia, although some say prices could drop significantly once the Russian-Ukrainian war is over. And as the reopening momentum picks up, banks are a safe bet.
Risks related to results
While financial results have so far been satisfactory this year compared to 2021, Yoong does not rule out the possibility of lower profits for regional companies in the second half of 2022, due to inflation caused by shortages. supply as well as by the weakness of the currencies.
“I expect corporate earnings of the majority of listed companies to decline in 2023, with higher commodity prices and wage inflation. The huge potential of Southeast Asian economies is growing. medium to long term The best investment opportunities arise when the fear is greatest.
While growth is expected to pick up once the economic recovery gathers pace, Ng believes the momentum will translate into higher corporate profits for Asean firms, despite the short-term hit from the high inflation and currency volatility.
He says: “ASEAN is becoming more and more important for the world’s superpowers. At the same time, regional companies must seek a more balanced trade policy. They can source their raw materials elsewhere and do not necessarily have to use the US dollar for transactions.
There are still some underrated gems out there for those who care to do their homework.
Yoong points out that many small- and mid-cap stocks — especially those involved in the tech manufacturing sector — in Singapore and Hong Kong are grossly undervalued due to low interest from institutional and retail investors.
He says: “Many listed companies are trading at earnings multiples in the low teens and respectable returns on equity.”
While commodity companies stand to benefit from inflation, the energy crisis and the global food shortage – which will persist for at least a year until demand destruction sets in – Yoong says the Small-cap and mid-cap plantation stocks will be quite attractive over the next few years. 12 months.
He also favors oil and gas service companies with healthy balance sheets that rely primarily on Petroliam Nasional Bhd (Petronas) and other upstream companies in Malaysia.
He says, “These companies have been in the doldrums since 2016. Petronas will most likely increase capital spending for 2023, with the price of oil expected to stay above US$80 for the next two to three years. The oil and gas (O&G) industry has been at the bottom of the capital cycle for the past three years.
“Petronas expects to allocate an average of RM20 billion in investment in upstream business over the next five years. It was much lower in the past two years, at RM12 billion per year on average.
Ng prefers O&G-related companies such as Hibiscus Petroleum Bhd and Dagang NeXchange Bhd, which have benefited from rising oil prices.
The strength of the United States will diminish
Rather than a strong US dollar, Yoong is more concerned about runaway inflation.
“The strength of the US dollar is not sustainable. There is still room for the US dollar/ringgit exchange rate to rise to 4.70 over the next 12 months as Bank Negara Malaysia will be less aggressive than the Fed in raising interest rates,” says- he.
“US dollar strength is currently being driven by the Fed Chairman taking a hawkish stance by raising interest rates past neutral. He is pricing in many rate hikes. Many Reserve Banks in the world are still hesitant to raise interest rates for fear that economic activity will be negatively affected.
Pankaj believes the US dollar is nearing its peak as he believes the market has overpriced the pace of interest rate increases.
“We could see a withdrawal of liquidity from the market via a tightening. This would mean that the economic momentum would start to slow considerably. interest rate will not be there.
“Although the Fed is still behind the curve, I don’t think the rate hike will be as aggressive as the market expected. An economic downturn will cause the Fed to turn dovish and the dollar to weaken,” says Pankaj. .
Ng estimates that the ringgit will reach the level of 4.40 to 4.50 given the country’s solid foreign exchange reserves and trade surplus.
He believes that when the monetary outlook improves, regional currencies will once again attract foreign funds.
“We cannot say that the valuation of regional markets is very attractive as we are still living with Covid, coupled with lingering issues such as the US-China trade war, Russian-Ukrainian conflicts and rising commodity prices. There are many external factors, but Asean is still a good place to park your investment.”
Domestically, Ng says, the impact of the one-time prosperity tax should not cloud the longer-term outlook.
For those with the stomach for risk, Ng suggests a small exposure to cryptocurrencies. “If you are unfamiliar, I would strongly advise against investing in alternative investments like cryptocurrencies. This should not be the core investment.
Pankaj says investors should be aware of where they are putting their money before making any investment decisions in the cryptocurrency space, where prices have recently taken a severe beating, with Bitcoin crashing to a 17-month low of US$25,400 (RM111,770), following the collapse of stablecoin TerraUSD.
“There is no fundamental value for some of the cryptocurrencies in the first place. They will also never replace legal tender currency,” Pankaj adds.
Overall, investment experts believe stocks remain a better investment choice than more esoteric asset classes.
“Well-managed companies with good pricing power and strong cash flow can weather the plague of inflation,” Yoong says.