The effects of the Federal Reserve's interest rate cuts become evident

Southeast Asian stock markets have solidified their position as the most favored investment targets for fund managers amid the Federal Reserve's policy shift. Four of the five best-performing Asian stock indices this month come from the region, with Thailand leading the pack.

This buying frenzy has led to a fifth consecutive week of foreign capital inflows into the region, with the MSCI ASEAN Index nearing its highest level since April 2022. Factors fueling investor enthusiasm for markets such as Indonesia and Malaysia include relatively low foreign investor positioning, supportive local policies, and attractive valuations. These advantages create opportunities for the region to benefit from global investors shifting away from larger economies.

Southeast Asia is full of opportunities

John Foo, the founder of Valverde Investment Partners Pte, stated: "Southeast Asia has been overlooked for so long. Investors are starting to realize that there are plenty of opportunities, from Indonesia’s commodity companies to Singapore’s stable REITs market, Malaysia’s tech firms, Vietnam’s export companies, and Thailand’s many recovery plays."

A key factor in favor of the Southeast Asian market is that foreign funds hold relatively small positions, leaving room for them to increase their allocations. Valuations also appear attractive, with the MSCI ASEAN Index’s 12-month forward price-to-earnings ratio at 13.6 times, compared to the five-year average of 14.7 times. Kenneth Tang, portfolio manager at Nikko AM Shenton Thrift Fund, said that recent positive policy catalysts, such as Indonesia’s fiscal easing measures and incentives in Thailand and Malaysia encouraging equity holdings, have also contributed.

Southeast Asian markets are boosting

A nascent rebound in Southeast Asia’s stock markets is poised to extend on an improving economic outlook, with the Federal Reserve’s policy shift emerging as another catalyst.

Brokerages have taken notice. Goldman Sachs this month upgraded Thai stocks from underweight to market weight (neutral), with the bank’s strategist Timothy Moe writing in a report that the newly formed state-owned Vayupak Fund in Thailand is expected to provide "sentiment and liquidity support, attracting foreign capital back to the market."

He added that countries in the region have benefited from their high exposure to interest-rate-sensitive and high-yield sectors, from banks to property developers. These factors have boosted Southeast Asian markets, with the ASEAN Index outperforming the MSCI Asia Pacific Index by about 14 percentage points since early July.

Last month, Nomura Holdings upgraded its ratings for Malaysian and Indonesian stocks. Chun Hong Lee, portfolio manager at Principal Asset Management Bhd, noted, “If Fed rate cuts continue and there’s no recession, this rally could extend until the end of 2025.”

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