Emerging Stock Markets_ASEAN (Dic. 2010]

8/6/2019 Emerging Stock Markets_ASEAN (Dic. 2010]

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Emerging Stock Markets:The case for ASEAN countries

Dr. Elke Speidel-Walz,

Private Wealth Mana ement

Private Wealth ManagementDeutsche Bank Dr. Elke Speidel-Walz, December 2010

Private Wealth ManagementDeutsche Bank

Deutsche Bank AG, Frankfurt

December 2010

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Reasons for structural re-rating ASEAN economic integration

Benefiting from higher wages in China

Agenda *



- un amen a s

ASEAN-4 stock markets: country summaries

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*) Please note: We focus here on the long-term structural case for the Asian stock markets with a lower weight in regionalindices. We focus on ASEAN-4: Indonesia, Malaysia, Philippines, Thailand. While Vietnam offers also promising long-termpotential, we leave it out in this piece, since the next 1-2 years could be very challenging, as Vietnam reveals the typical side-effects of a credit-fuelled consumption bubble which makes higher interest rates necessary and poses the risk of a visiblecurrency devaluation.


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ASEAN - Reasons for structural re-rating:1) Regional integration

Increasing trade links within Asia, benefits of regional economicintegration, catalysts for a sustained re-rating

Single ASEAN Economic Community in 2015

ASEAN free trade zone to create a single market of 600m


Private Wealth ManagementDeutsche Bank 3

,among the fastest GDP growth globally

Already intra-ASEAN trade is more than the regions trade withthe US and Europe combined

Increase of overseas investment by Thai corporates

Free-trade agreements with China and India


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ASEAN - Reasons for structural re-rating:2) Benefiting from rising wages/consumption in China

ASEAN benefits from rising wages/wealth/consumption in China Higher Chinese consumption goods imports Indonesia (palm oil) and

Malaysia benefit (electronic and electrical goods)

Higher Chinese demand for services rising travel and tourism spending All ASEAN countries benefit.

Malaysia, Singapore and Thailand aim to develop the medical tourism



industry. Philippines benefit from IT services exports

Higher wages in China allow competing countries to also accept higherminimum wages or improves competitive stance (but note: a part of the

potential relocation will be to Chinese lower cost-inland provinces rather than

other countries !)

Malaysia had the most suppressed wage growth (2.6% p.a., belowinflation!) in the past decade due to Chinese competition (followingChinas WTO entry). Recently Malaysia introduced minimum wages

Thailand: highest export similarity with China and similar wage structure


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ASEAN - Reasons for structural re-rating:Improving fundamentals

Increasing regional trade bolsters long-term economic growth Trade with China

ASEAN targets for 2015

Solid fiscal positions

Much lower budget deficits and public sector debt levels than in



developed markets

Sound banking sectors

Big difference to Asian crisis late 90ies

Better economic policy quality

Political stabilization, market-friendly governments Central banks


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ASEAN - countries: Divergence



Source: UBS Research, November 2010

Big difference within the ASEAN-4 (Indonesia, Malaysia, Thailand,Philippines) in GDP per capita levels from Malaysia (7000 USD) and

Philippines (1800 USD)

By far the most populous country: Indonesia

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ASEAN-4: Economic situation and outlook

GDP growth to slow down in 2011afterstrong rebound

Inflation: high sensibility to agricultural

prices and reduction of subsidies(Indonesia) pose upward risks

Monetary policy normalizing, but fear of

ASEAN Economic Indicators

Indonesia 2010 2011

GDP (YoY %) 6.0 6.5

CPI (YoY %) 5.1 6.5

Budget surplus (% of GDP) -1.1 -1.1

Current account balance (% GDP) 1.0 1.1

Government debt (% GDP) 27.0 26.0

Thailand 2010 2011

GDP (YoY %) 7.7 4.0

CPI (YoY %) 3.3 3.5

Central government s urplus (% GDP) -1.1 -3.3



of rate hikes gradual

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Malaysia 2010 2011

GDP (YoY %) 6.8 4.0

CPI (YoY %) 1.7 2.6

Federal governm ent s urplus (% GDP) -5.4 -6.0



Philippines 2010 2011

GDP (YoY %) 6.8 5.5

CPI (YoY %) 3.7 4.0

National governm ent s urplus (% GDP) -3.9 -3.6



Source: Deutsche Bank Global Markets, EM Monthly, Dec. 8, 2010


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ASEAN: Growing importance



Source: JP Morgan Research, December 2010

Size of the ASEAN economies is catching up

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ASEAN fundamentals: Debt levels

Public sector debt, % GDP



Source: Asian Development Bank, December 2010

Indonesia, Philippines and Thailand with much lower debt levels than in the past

In most ASEAN countries debt sustainability is supported by high domestic savings

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ASEAN fundamentals: Banking sector soundness

Banking sector vulnerability: non-performing loans (% of commercial loans)



Source Asian Development Bank, December2010

Non-performing loans much lower than in the past in all Asian countries. Very strongimprovement in Indonesia, the Philippines, and Thailand

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ASEAN stock market performance 2010

Stock price indices (Jan-Nov), % chg



Source: Asian Development Bank, Dec. 2010

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ASEAN currencies

ASEAN currencies gained in 2010 (% chg. Jan-Nov)

15

20

25

vs. Euro vs. USD



0

5

10

Improving fundamentals, privatisations should continue to attract high capital inflows supporting currencies

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Indonesia

Strength/positive:

Structural advantage: demographic dividends. Indonesia is the 4th most populouscountry globally (238mn), positive population growth trend and structure. Indonesianmiddle class doubled in past 10 years (now 93 million)

Sectors benefiting from strong population: consumer stocks, property andinfrastructure-related equities.

Banks benefiting in the strong GDP growth environment, but pressure given the



Strong FDI inflows to record levels in 2010 due to re-emergence of manufacturingsector

Structural: increasing market shares in textiles exports due to low wages

Fiscal prudence to continue, possibly facilitating an upgrade to investment grade byat least one rating agency next year

Risks/weakness:

Inflation: a general topic in EM in 2011, Indonesia exposed to this risk due to high-growth, high inflation setup.


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Malaysia

Strength/positive

Malaysias stock market is very much dominated by domestic-demand-orientedsectors (66% of the index market cap, contribute to 92% of earnings for 2010)

Rising inflation pressure is less of a worry than in other Asian countries, despite strongdomestic demand:

Inflation pressure limited by currency appreciation, hence monetary tightening willbe moderate equity return outlook positive



, , ,and other minerals) as an inflation hedge

A structural positive: closer ties with Singapore, increasing consumption goodsexports and tourism revenue

Economic Transformation Program (ETP) 2011-2020 in order to bolster private sectorinvestment

Risks/weakness

Malaysia has to bolster growth forces and push into higher value-added activity

Policy errors/capital control design


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Philippines

Strength/ positive

Strong growth outlook, bolstered by foreign workers remittances (10% of GDP!)

Strong consumption

Strong service exports (business processing outsourcing )

High capital inflows / remittances support currency

Property sector with catch-up potential (under-penetrated)



Risk/weakness:

Valuation stretched

Small and less liquid market (only 17 stocks)


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Thailand

Strength/positive

Recovery of domestic demand and private investment to continue

Financials a cheaper way to play the recovery in domestic demand and, in particular, recoveringprivate investment which should boost loan growth

Housing sector: Residential property demand remains strong due to rising householdincome, high affordability and socio-economic change. Expect further rapid urbanisation drivenlargely by private, rather than public investments

Strong earnings momentum, valuation still attractive



Tailwind from relative strength of the agricultural sector in an environment where demand forsoft commodities is expected to be firm

Tailwind from potential reallocation of investment capital into the country (due to Yenstrengthening)

Risk/weakness

Inflation tends to be sensitive to global commodity prices, unlike in Indonesia and Malaysia inthe absence of subsidy programs, unlike Indonesia and Malaysia.

75% in financials and energy

Parliament election in 2011, concrete date not known, source of volatility

Emerging Stock Markets_ASEAN (Dic. 2010]

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