Thai Tourism Plays Beckon as Asean Seen as Trade-War Shelter

(Bloomberg) -- As a U.S.-China trade war threatens to wreak collateral damage on the globally-connected North Asian economies, Southeast Asia’s domestically-focused and relatively cheap stocks are looking more appealing.

“Asean would act as a relative safe haven during a trade war,” said Nader Naeimi, the Sydney-based head of dynamic markets at AMP Capital Investors Ltd., which oversees around $130 billion. More domestic-focused stocks, relatively low exports to the U.S. and a bigger reliance on commodities are the reasons to own Southeast Asian shares at the moment, he said.

Thai Tourism Plays Beckon as Asean Seen as Trade-War Shelter

Thailand’s SET Index had fallen only 0.1 percent since Thursday’s close as of 1:29 p.m. in Bangkok, while the Kuala Lumpur Composite Index was down 1.1 percent. That compares with drops of 4.2 percent in the Shanghai Composite Index and 2.4 percent in the Kospi Index.

Read more: Southeast Asia Sees Mixed Impact From U.S.-China Trade War

Domestic stocks such as banks, real estate and telecommunications companies make up a much bigger proportion of the MSCI Inc.’s Southeast Asian share index than the wider Asian gauge.

Weight %MSCI Asia Pacific IndexMSCI Asean Index
Internet Software7.30
Telecom Services0.63.4
Real Estate3.75.6
Source: MSCI Inc., Bloombergas on Feb. 28

Given the diversity within Southeast Asia, investors will need to take a discerning approach to find the best defensive plays. Thai tourism companies, Singaporean financials and Malaysian auto stocks are some of strategies favored by these asset managers:

Indonesia, Thailand

Kelvin Tay, regional chief investment officer at UBS Wealth Management

  • “In terms of exposure to Asia, Southeast Asia looks more interesting at this point in time as it’s more diversified and not as reliant on exports as North Asian markets are”
  • Valuations also look more appealing than North Asia. UBS Wealth is currently overweight Indonesia and Thailand
  • “Indonesia fundamentals are turning, the infrastructure allocation by the government has gone up and we see the trickle down effects will start to be felt this year.” Inflation is well controlled and UBS forecasts 5.3% GDP growth this year, higher than 5% in 2017, and says there’s upside risk to that. The government looks very stable and “oil prices are ideal at this point, not too low and not too high for Indonesia”
  • Thailand looks attractive because the tourism industry is strong and there’s not much of a possibility that will weaken. Spending on several transport infrastructure projects looks set to pick up. “If you put everything together, Thailand is one market that looks pretty interesting”

Singapore, Malaysia

Chetan Seth, strategist at Nomura Holdings

  • Asean has solid underlying macro momentum with earnings that have so far lagged macro, Seth said in March 20 note. Also has relatively light investor positioning and relative multiples vs region that don’t appear exorbitantly rich, as well as below average exposure to the global trade, electronics exports cycle
  • At the moment, Nomura has a tactical overweight on Singapore and Malaysia, underweight on Indonesia and Thailand and is neutral on Philippines
  • In the longer term, it favors countries that possess strong and sustainable earnings growth, idiosyncratic country themes, lower than average vulnerability to global liquidity flows, stable politics/democratic conditions and reform impetus. The Philippines and Indonesia appear best-placed in Asean on these criteria

Thai Banks, Tourism

Steven Kang, senior vice president at Auerbach Grayson

  • Thailand will likely do well with its banking sector improvements on better NPL outlook and credit growth expectations, especially on corporate credit.
  • Tourism has steadily increased, with Chinese and Indian inbound tourists showing particular strength. Auerbach Grayson likes Minor International and Robinson as Thai tourism plays

Malaysian Autos

Aaron Oh, investment analyst at Aggregate Asset Management

  • From a valuation perspective, countries like Singapore, Thailand and Malaysia have relatively lower valuations based on earnings
  • “We’re able to find cheap companies in the automotive industry in Malaysia -- such as DRB-Hicom, Tan Chong Motor Holdings and MBM Resources -- and Thai construction company Prinsiri is also inexpensive

Thailand Favored

Frank Benzimra, head of Asian equity strategy at Societe Generale

  • In a study SocGen published in November, it found that Indonesia, Thailand and Malaysia were the three best-performing Asian markets when the S&P 500 Index was in a bear market. But that alone is not a good enough reason to invest in these markets, as you need to have confidence in their fundamentals
  • “Thai market fundamentals have improved. The metric that we use is earnings. Since last summer the domestic earnings component of the Thai market has seen some improving momentum, something linked with banks’ profits. A big current-account surplus, a reason for the strong baht, also helps"

Indonesian Property

Camilla Goh, executive director of equity research at Bank of Singapore

  • “As we’re mindful of the potential impact of unprecedented global central bank unwinding on smaller Asean markets, we are selective in our bottom up stock picks”
  • “Our preferred picks include more liquid blue chips with stronger earnings growth prospects,” such as Singapore financials, selected Thai domestic consumption recovery ideas and Malaysia infrastructure development beneficiaries
  • “Value plays within the Indonesia property sector, which trade at attractive valuations and have seen moderated investor expectations following the sector’s underperformance to the Indonesia equity market over the past year”

Financials, Energy

Daniel Morris, senior investment strategist at BNP Paribas Asset Management

  • "From a trade and currency point of view -- on the assumption the U.S. dollar continues to depreciate against EM currencies -- the Indonesian and the Philippine equity markets depend relatively less on U.S. sales”
  • The more defensive sectors are those that generate their revenues primarily from domestic demand, such as financials and energy

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