MANILA: Investors should buy Southeast Asia stocks on weakness amid the rise in near-term volatility brought about by renewed trade tensions between the U.S. and China, according to Sean Gardiner and Aarti Shah, analysts at Morgan Stanley.
China equity rally, higher oil, resilient dollar and MSCI rebalancing overhang “soured" what would have been a good year for Asean stocks.
"Our base case is that trade re-escalation is temporary and policy support will keep the global economy on a gradual recovery path".
If trade tensions persist, corporate confidence to suffer a second blow within a short period of time if trade tensions persist, dampen transmission from policy easing and easier financial conditions.
Morgan Stanley prefers Southeast Asia’s equities markets as follows: Indonesia, Singapore, Malaysia, Philippines and Thailand.
Indonesia kept overweight even with 10% cut in index target as recent selloff has valuation cheaper; index target implies 9% gain.
Next three months to be volatile for Indonesia equities due to stronger dollar, high oil prices, seasonal current account outflow and MSCI rebalancing headwinds.
Other reasons for overweight: rate cuts are coming; earnings growth to accelerate; reform talk gathering pace.
Singapore valuations still provide some upside, look attractive at 12.3 times estimated 12-month earnings; index target implies 7% upside.
After dropping from 13% to 6% in 18 months, next 12 months earnings growth has stabilised and earnings revisions should turn positive.
Malaysia’s moving to equal-weight with earnings headwinds from softer growth backdrop already priced-in by market as indicated by 12 ppts year-to-date underperformance relative to region, narrower valuation premium.
While higher oil prices will provide equities with support, Morgan Stanley says it’s held back in moving rating to overweight as 12-month forward valuation is in-line with five-year average.
Philippines kept underweight even as index target has been raised 9% as market seem to have already priced in expectations of two more rate cuts this year; index target implies 5% gain.
“2019 nominal GDP consensus estimates have been cut a full 90bps year to date while earnings estimates have been more resilient. But, if we look into 2020 we think expectations remain too high and haven’t yet factored in a rise in the cost of debt".
Thailand moved to least preferred market as geopolitical stalemates slow economic growth, and that would have negative impact on corporate earnings.
Market is poorly held, with foreigners selling $10.1bn of equities since early 2018 and are 40bps underweight relative to MSCI EM index.
Valuations aren’t appealing - 14.5 times NTM P/E, a 15% premium to one year average - and consensus earnings are still 7% too high. - Bloomberg