The exuberant exchanges of Thailand, Indonesia and the Philippines are Asia’s best-performing stock markets this year, and investors believe this success can continue despite valuations at multi-year highs.
Thailand’s SET index has risen 18 percent in 2016, versus 8.8 percent for the benchmark MSCI Asia ex Japan . The Jakarta Composite index is up 17.3 percent and the Philippines’ PSEi has gained 12 percent.
Valuations have surged alongside. MSCI Thailand is trading at a 16-year high of 14.9 times earnings, compared with its 20-year average of 13.4. MSCI Indonesia is trading at 16.8 times earnings, its highest since July 1999. The Philippines is close to its 15-year price-to-earnings peak hit in February 2015. Many investors think further gains are in the offing.
“While stock valuations are above historical averages, the earnings outlook for 2017 has become more positive, especially in Indonesia and Thailand,” said Jolene Seetoh, director for Asia ex-Japan equities at United Overseas Bank (UOB) in Singapore. “Improving economic fundamentals and growth in corporate earnings should drive positive market performance over the medium to long term,” she said.
Fund flows support that view. Indonesia, Thailand and Philippines have seen $7.3 billion of foreign equity inflows this year, compared with $11 billion of outflows over the last three years, Sean Gardiner, equity strategist at Morgan Stanley Asia, wrote in a research note.
All three countries’ second-quarter gross domestic product growth beat forecasts. Thailand’s economy expanded 3.5 percent from a year earlier, the best in 13 quarters. Indonesia grew 5.2 percent, and Philippines rose by 7 percent, the fastest year-on-year growth in three years. Thailand’s military government, which recently won public support in a referendum, is expected to distribute more wealth to the countryside, bolstering consumer spending and economic growth generally, said Mark Mobius, executive chairman of the Templeton Emerging Markets Group.
In the Philippines, “the new government’s strong stance on crime is receiving support from the countryside and particularly among the low-income segment where crime has been a major problem,” Mobius said. “This is going to feed into a general feeling of confidence and consumer spending and investment is picking up.”
In Indonesia, President Joko Widodo’s reforms are finally progressing and confidence in his ability to implement reforms to attract investment is growing, Mobius said. A Federal Reserve interest-rate hike this year, however, could lead to some short-term stock volatility, UOB’s Seetoh said.
Half of all Philippine and Thai companies beat second quarter earnings estimates, Morgan Stanley data show. Indonesia was the laggard, with only 32 percent of companies beating estimates and 44 percent falling short. Analysts expect Thai earnings per share (EPS) in 2016 to be 10.7 percent higher than 2015, after a 1.4 percent decline in 2015, according to data from Nomura. In the Philippines, EPS are expected to be 7.6 percent higher than in 2015, when they rose 5.8 percent. Indonesian EPS are forecast to rise 7.2 percent in 2016 from an 8.2 percent decline in 2015.
Of the three markets, Indonesia’s ability to sustain such rapid share price growth has raised the most doubt, particularly because its recent gains have been fuelled by a tax amnesty bill meant to encourage Indonesians to repatriate money held offshore, and those inflows have been disappointing, John Woods, Credit Suisse Asia Pacific chief investment officer, wrote in a note.
“The market rally appears to be riding on irrationally high hopes,” he said. “The economic recovery has… been subdued and could face challenges in the second half as a rising fiscal deficit limits government spending, leading to potential earnings downgrades.”