Taper Tantrum Redux Batters Southeast Asia as Equities Slump

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The lowest Southeast Asian stock valuations in at least six years are proving no lure for international investors as prospects for higher U.S. interest rates spur capital outflows.

The MSCI Southeast Asia Index has dropped 9.2 percent from an April 24 high through Wednesday, sending its price-to-book ratio to the cheapest relative to global equities since Bloomberg began tracking the data in 2009. Foreign investors have sold a net $600 million of Indonesian, Philippine and Thai stocks this month, on pace for the biggest withdrawals in at least six months.

Two years after Southeast Asia paced losses in global equity markets during the so-called taper tantrum, shares are tumbling once again as Federal Reserve Chair Janet Yellen prepares to raise interest rates by December. JPMorgan Asset Management and BBL Asset Management Co. say it’s too early to buy as regional economic growth slows and currencies weaken.

“If Southeast Asian stocks become even cheaper we might consider adding again,” Grace Tam, a global market strategist at JPMorgan Asset Management said by phone from Hong Kong. “But right now the growth is not good, earnings are not good.”

The MSCI Southeast Asia gauge trades at 1.8 times net assets, its lowest level since January 2014 and below the 2.2 multiple for the MSCI All-Country World Index.

Bad News

In Indonesia, the weakest currency in 17 years is limiting scope for the central bank to cut interest rates amid the slowest economic expansion since 2009. Slumping Thai exports and domestic demand are challenging the military junta’s efforts to boost the economy a year after seizing power. Growth in the Philippines slid to a three-year low in the first quarter.

Southeast Asian markets were among the biggest beneficiaries of Fed stimulus as investors sought riskier assets, with stock indexes in Thailand, Indonesia and the Philippines surging more than 200 percent in the six years through 2014.

“The concern about U.S. interest rates is just more bad news for Southeast Asian equities, which are already becoming the least preferred markets among foreign investors,” Pakorn Peetathawatchai, an executive vice president at Thailand’s bourse, said in an interview on Wednesday.

The case for raising borrowing costs in the U.S. was bolstered last week by data showing the biggest jump in U.S. payrolls in five months. The Federal Open Market Committee meets on June 16-17, with economists predicting an interest-rate increase by year-end.

Taper Tantrum

Declines in regional equities are unlikely to reach extremes of two years ago, when comments by then-Fed Chairman Ben S. Bernanke that the U.S. was considering tapering bond purchases helped send the MSCI Southeast Asia Index down more than 20 percent, according to Adrian Zuercher, the Hong Kong-based head of Asia asset allocation at UBS Group AG.

“We do not think that we will experience a taper tantrum II event,” Zuercher said. “While there will be some repatriation of money back to the U.S., as the Fed will only move very gradually, we do not expect a capitulation towards Asian investments.”

The Jakarta Composite Index entered a correction Tuesday after falling more than 10 percent from its April 7 high. The Philippine Stock Exchange Index dropped to its lowest level in five months this week, while the Thai SET Index erased its gains for the year. The FTSE Bursa Malaysia KLCI Index has declined 6.8 percent from its 2015 peak.

Bleak Outlook

The Jakarta Composite fell 0.1 percent at the close on Thursday, when the Philippine and Thai stock gauges gained more than 0.7 percent. Malaysia’s equity index lost 0.1 percent, while the MSCI Southeast Asia index advanced 0.2 percent.

The prospect of better returns in north Asian stocks will probably spur further outflows from Thailand, Indonesia and the Philippines, said Voravan Tarapoom, the chief executive officer at BBL Asset Management, which manages about $15 billion.

The Shanghai Composite Index has gained 58 percent this year, while Hong Kong’s Hang Seng Index and Japan’s Topix have advanced more than 13 percent.

“With limited resources, investors should continue to switch from underperforming assets like Asean markets into those outperforming like China,” Voravan said. “The outlook for Asean markets will remain unexciting and bleak.”

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