The research arm of Morgan Stanley remains relatively cautious on ASEAN, citing challenging macro economic conditions, but has a relative preference for Singapore companies compared to those in Indonesia and Thailand, Topiwalla said.
He believes Indonesian companies’ net profit margin (NPM) has peaked after so many years of strong growth and the NPM of Singaporean companies has troughed after seven years of a global growth slowdown.
“Singapore is the only market seeing upside in earnings revision,” he said, adding that valuations in Singapore are also more attractive than in Indonesia and Thailand.
ASEAN as a whole, he forecasted, will have sluggish revenue growth. Net profit margin will become the most important criteria for investment decisions, which in turn will drive the sub-region’s markets.
Citing the research house’s recent report, he listed ASEAN’s five most productive companies: Indonesia’s Matahari Department Store and Surya Citra Media, Thailand’s CP All, and Singapore’s Thai Beverage and Singapore Exchange.
However, Topiwalla said investors in ASEAN should now focus squarely on productive companies that are improving profitability and have operations that will benefit from global growth.
“The domestic consumption story in ASEAN is coming to an end.
“If global growth remains choppy but recovery is real and certain, then pockets of global cyclical stocks would do well.”
His assessment of ASEAN in the next five years was tempered by concerns. “In the last ten years, a rising tide lifted all boats. The tide was driven by free availability of capital, free labour and China and the US economies doing well.
“This lifted all emerging markets including ASEAN countries. However, in next five years these tailwinds are likely to turn into headwinds. Capital is going to be more expensive, labour will be scarcer, and China and the US are not going to be as supportive for global growth as they were in last ten years.”
Tough macros
Deyi Tan, executive director, highlighted a few of the challenging macro conditions in the ASEAN region.
Growth for the next few years will be lower, he said. “We have come to a point whereby the urgency for policy makers to step out in terms of policy, such as interest rate hikes and currency depreciation, and structural reforms, such as macro re-balancing to improve competitiveness in a non-commodity cycle, is placed one notch higher.”
In the case of Indonesia, soft commodity prices, a large current account deficit and interest rates would constrain the gross domestic product growth.
Furthermore, Tan said China’s growth slowdown has an indirect impact on ASEAN trade, which will hurt the net commodity exporters in Indonesia and Malaysia.
She had a bearish view of Thailand. Domestic consumer demand remains muted in the post-coup environment and the country’s demographics are the weakest in the region.
The dependency ratio, which measures the people who are either too old or too young to work versus the working age population, is rising. “We see it rising at a steeper pace than in China and that could be an impediment for potential growth,” she said.
Even in Singapore, the government’s measures to curb foreign labour could act as an obstacle.
“Labour supply shock will put a cap on how fast growth can be and how much inflation could fall.”
The Philippines is better placed than other economies, as it is not exposed to global liquidity and commodity cycles, she said.
However, the three risks are whether the economy is overheated, whether high growth is sustainable and the 2016 elections, which could have implications for structural reforms.
“Countries like Thailand and Singapore will have to improve their productivity to arrest the impact from the greying population and labour supply shock. The Philippines will have to ensure investments are picking up.”
A look at the one-year performance of equity funds in the Singapore uinverse investing in Singapore, Indonesia and Thailand markets. Morgan Stanley believes ASEAN is moving into a slower growth phase:
