The Best Shelter From Yield Havoc May Be Southeast Asia Equities

Southeast Asian stocks could be safe havens amid the disruption in global risk assets led by spiking yields, according to market watchers.

Some of that confidence is already on display. The benchmark equity gauges of Indonesia, Malaysia and the Philippines were little changed in trading Friday morning despite the sell-off in the U.S. and other large markets. Singapore’s Straits Times Index was down 1%, paring its loss of as much as 1.8%.

The Best Shelter From Yield Havoc May Be Southeast Asia Equities

Four key reasons may explain the trend:

  • Most of Asean’s peers are overbought. The rally in emerging and Asian markets is looking stretched on multiple indicators, according to some brokers including Morgan Stanley. On Wednesday, the firm upgraded Singapore equities to overweight in its Asia allocation, citing cheap valuations and improving earnings and economy.
  • Stocks are relatively cheap according to price-to-earnings ratios. While the MSCI Asean Index’s valuation is one standard deviation above its five-year average, those for Asian and emerging market gauges are more than two standard deviations above their mean, according to data compiled by Bloomberg.
  • Lack of big technology stocks. What until the end of last year was considered a bane of the region’s stock markets could now act as a boon, as rising yields change earning assumptions for technology stocks.
  • Billions of dollars have already left over the years. Thailand is set for for a fifth year of foreign outflows and Malaysia and the Philippines are staring at a fourth year of annual withdrawals, according to data compiled by Bloomberg.

Southeast Asian stocks should act as safe havens as “valuations are not as stretched as they are in the U.S., and have not been hyped up by the retail flows,” said Gary Dugan, chief executive of the Global CIO Office. “Singapore should be a safe harbor as it has a low correlation with U.S. interest rates and has been a marked underperformer.”

Singapore’s equity gauge has dropped 5.6% over the last year versus a 2% gain in Southeast Asia’s benchmark and the 30% surge in the MSCI Asia Pacific Index.

©2021 Bloomberg L.P.

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