Southeast Asia Shares Best With Top Risk-Adjusted Returns

Southeast Asia Is Haven 15 Years After Crisis
The Philippine Stock Exchange Index produced the second-highest total return with the fifth-lowest volatility for a risk-adjusted gain of 7.2 percent over the three-year period, the best in the region. Photographer: Brent Lewin/Bloomberg

Southeast Asia, the heart of the 1997 currency crisis, produced the best risk-adjusted returns for Asian stocks since global markets started to rebound three years ago, as investors sought a haven from Europe’s debt turmoil.

Benchmark indexes in the Philippines, Malaysia, Thailand, Indonesia and Singapore returned the most among Asia-Pacific markets worth more than $100 billion in the three years ended July 17, according to the BLOOMBERG RISKLESS RETURN RANKING. All five beat an index of developed markets by risk-adjusted returns, and four came out on top over five years.

“Investors have been focused on and rewarded in the smaller Asean markets because they have been more defensive and domestic-oriented,” said Timothy Moe, a Hong Kong-based strategist at Goldman Sachs Group Inc., referring to the Association of Southeast Asian Nations. “That’s been a better source of growth than what we see in the other more cyclical markets in North Asia. It probably will continue,” he said in a Bloomberg television interview in Hong Kong on June 26.

Southeast Asian governments have bolstered spending on infrastructure and stepped up efforts to spur domestic consumption in a bid to reduce their economies’ reliance on exports. That’s helping to shield the nations from Europe’s debt crisis and a global economic slowdown, which has fueled volatility in the northern Asian markets.

Asean countries shipped 32.9 percent of their exports to the U.S. and European Union in 2010, down from 72.4 percent in 2000, according to data from the organization’s website. China’s exports to the EU and U.S. accounted for a combined 38 percent of total overseas shipments in 2010, according to Bloomberg calculations based on data from the customs bureau.

Volatile North

North Asia had six of the 10 most volatile stock indexes for the three years through July 17, according to Bloomberg’s riskless return ranking. Four of the six are China-related. Malaysia, Singapore, the Philippines and Taiwan had below average volatility readings.

Southeast Asia “is where we find the best quality companies at the most attractive prices,” Alistair Thompson, who helps manage $43 billion at First State Investments in Singapore, said in a phone interview on June 28. “There is more domestic momentum. We won’t change our holding in Southeast Asia. Not until we see better value elsewhere.”

The Philippine Stock Exchange Index produced the second-highest total return with the fifth-lowest volatility for a risk-adjusted gain of 7.2 percent over the three-year period, the best in the region. Thailand ranked second, helped by the highest total return and average volatility. Singapore was fifth, with a risk-adjusted return of 2.3 percent.

Developed Markets

All five beat the MSCI World Index of developed markets, which returned 2 percent after adjusting for price swings, and all but Singapore did better than the Standard & Poor’s 500 Index, the benchmark for the U.S., which gained a risk-adjusted 2.7 percent.

Indonesia, Malaysia, Thailand and the Philippines also topped the risk-adjusted return ranking over the past five years, with Malaysia posting the lowest volatility and the Philippines having the fourth-lowest price swings.

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A lower volatility means the price of an asset does not swing dramatically over a specified time period, reducing the potential for unexpected losses.

Outpacing Europe

In the past three years, Southeast Asia’s economies have seen average quarterly growth rates of between 1.8 percent in Thailand and 6 percent in Singapore, compared with average growth of 0.6 percent in the U.S. and a 0.3 percent contraction in the euro region, according to data compiled by Bloomberg.

Five Asean economies -- Indonesia, Thailand, Philippines, Malaysia and Vietnam -- along with China and India will outpace the rest of the world over the next two years, according to the International Monetary Fund in a July 16 report. In 2013, the Asean-5 will grow 6.1 percent, compared with 2.3 percent in the U.S., 0.7 percent in the euro area and 1.5 percent in Japan, it said.

Faster economic growth has fueled stock-market gains and valuations. The MSCI South East Asia Index has rallied 13 percent this year, including dividends, and more than doubled since 2008. The MSCI Asia Pacific Index has gained 3.8 percent in 2012 and returned 43 percent since the end of 2008.

Dutch Lady

Companies that have benefited from Southeast Asian governments’ efforts to bolster consumer spending include Big C Supercenter Pcl, Thailand’s second-biggest retailer, Robinsons Land Corp., the second-largest Philippine mall operator, and Malaysia’s Dutch Lady Milk Industries Bhd., which have each surged more than 50 percent this year. PT Unilever Indonesia, the unit of the world’s second-biggest consumer-goods company, rose 28 percent in 2012, outperforming the Jakarta Composite Index’s 6.8 percent gain. UMW Holdings Bhd., a Malaysian assembler of vehicles for Toyota Motor Corp., has surged 42 percent, the top gainer in the FTSE Bursa Malaysia KLCI Index.

MSCI’s Southeast Asian measure rose 0.2 percent as of 11:14 a.m. in Singapore, poised for the highest close since May 8. The gauge is valued at 13.9 times estimated profit and trades at an 18 percent premium to the broader Asian index, the widest gap on record according to Bloomberg data going back to October 2009.

Southeast Asia is unlikely to sustain its outperformance as higher valuations and progress in resolving Europe’s debt crisis will help revive investors’ appetites for riskier assets, Markus Rosgen, Hong Kong-based chief Asian strategist at Citigroup Inc., said in a phone interview on June 26. Investors should start to favor North Asia instead of staying overweight in so-called defensive markets like Southeast Asia, he said.

‘Quite Defensive’

“For the moment, people are quite defensive and they like quality companies,” Rosgen said. “We are not convinced that what’s happening in Europe is another Lehman crisis. We’ve actually been telling people that what they should be doing is adding or thinking of adding to risks.”

Citigroup had underweight calls for the Philippines, Malaysia, Thailand and Indonesia, Rosgen wrote in a report dated June 29. He upgraded Singapore to overweight from underweight, saying that the island state is “the cheapest way to play Asean.” Singapore’s Straits Times Index trades for 13.9 times estimated profit, compared with its three-year average of 14.6, data compiled by Bloomberg show.

Southeast Asia “does not have debt problems like Europe,” Alan Richardson, a Singapore-based fund manager for Samsung Asset Management Co., who helps oversee $82 billion, said by phone on July 2. The region “hasn’t been through a strong investment up-cycle compared to the BRIC economies, so increasingly investors are seeing Asean has an alternative equity class.”

Asian Crisis

The region was the epicenter of the Asian financial crisis in 1997 when governments from Thailand to Indonesia depleted their foreign reserves in costly attempts to defend their currencies targeted by speculators. Thailand was forced to devalue the baht in July of that year, forcing companies to default on their debt. That sparked a slump in other regional currencies, which dragged Asian economies into recession. Thailand, Indonesia and South Korea were forced to seek International Monetary Fund bailouts.

The Philippines topped Asia’s risk-adjusted returns rankings in the three years to June 29 as government investment programs lured investors. Philippine stocks are valued at 16.4 times estimated earnings, the most expensive among 15 Asian markets tracked by Bloomberg. The index rallied 21 percent this year, Asia’s best performer after Pakistan, as the government announced a record spending program and plans to seek $16 billion of investments.

Felda Share Sale

The nation’s economy grew 6.4 percent in the first quarter, the fastest pace in Southeast Asia. Standard & Poor’s raised the nation’s debt rating on July 4 to BB+, one level below investment grade and the highest since 2003.

The FTSE Bursa Malaysia KLCI Index had the fourth-highest total return and the least price swings, making it No. 3 by risk-adjusted return over the three years. The measure rose to a record on July 17 and trades at 15 times estimated profit, the second-most expensive in Southeast Asia.

Najib Razak, who took over as prime minister in 2009, unveiled a program in 2010 that pledged $444 billion of private sector-led investments. Investors have also been lured by plantation owner Felda Global Ventures Holdings Bhd.’s $3.3 billion initial public offering, the world’s largest IPO this year after Facebook Inc. Institutional demand for shares exceeded supply by more than 40 times in the offering.

‘High Premium’

Both Malaysia and the Philippines “are at a premium in terms of valuations to the rest of emerging Asia,” Jonathan Garner, Morgan Stanley’s chief Asia and emerging-market strategist said by phone in Hong Kong on June 26. “The domestically driven nature of earnings and the currency stability mean people are much more comfortable with earnings risk than they are in countries that are more globally sensitive. At the moment, people are willing to pay a high premium for that earnings stability.”

Analysts estimate companies in the MSCI Southeast Asia Index will post sales growth of 14.2 percent this year, compared with a 13.1 percent increase for MSCI Asia Pacific Index companies, according to data compiled by Bloomberg. Southeast Asian companies generate average cash-flow of $78.79 a share, compared with $18.72 for shares in the MSCI Asia Pacific Index, the data show.

Record High

Thailand’s SET Index has rallied 19 percent this year as domestic consumption, industrial production and investments rebounded following the nation’s worst floods in almost 70 years in 2011. The Finance Ministry is forecasting 2012 economic growth of as much as 6.2 percent, compared with 0.1 percent in 2011.

Indonesia’s economy, Southeast Asia’s biggest, expanded 6.5 percent last year, the fastest pace since before the 1997 Asian financial crisis. Bank Indonesia has kept its benchmark interest rate at a record low of 5.75 percent for five straight months to help spur investment and consumption.

The Jakarta Composite index, which returned 107 percent in the three years to June 29, rose to a record on May 3. The gauge trades for 14 times estimated profit, compared with its three-year average of 14.8 times, data compiled by Bloomberg show.

Singapore’s Straits Times Index climbed 14 percent this year as low interest rates spurred property demand even as the government introduced real-estate curbs. New casinos and a Formula One night race helped the city draw a record 13.2 million tourists in 2011.

“We are very bullish about Southeast Asia as the region’s equities have impressively stayed resilient,” said Jessada Sookdhis, who helps manage about $632 million as chief investment officer at CIMB-Principal Asset Management Co. Ltd. in Bangkok. “We expect those markets to outperform other Asian peers. Their domestic consumption will continue to be the biggest drivers for economic growth.”

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