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ASEAN (Association of Southeast Asian Nations) may not have been on investors’ radars for some time, but a look at 2022 shows that it may be time to change that. Even if the coronavirus pandemic had a devastating impact on economies in the region, the outlook for 2022 seems brighter.
In 2020, real GDP for the ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand and Vietnam) contracted by 3.4% according to the International Monetary Fund (IMF), marking the first decline since the Asian financial crisis more than 20 years ago. However, rising exports, reopening and resumption of factory activities across the region have prompted elevated growth projections, with IMF forecasting the five major ASEAN economies to expand 5.8% in 2022.
What could Omicron fears mean for ASEAN?
However, with the current wave of the Omicron variant the region faces headwinds again. The new wave has already dampened economic estimates. The Asian Development Bank (ABD) has cut its economic growth forecast for Southeast Asia to 3.1 percent for 2021, down 0.1 percent.
According to Nick Payne, Head of Strategy, Global Emerging Markets at Jupiter Asset Management Southeast Asian countries fare worst in Bloomberg’s Covid resilience rankings. “Indonesia, Malaysia, Thailand, Vietnam and the Philippines have been in the bottom third for several months. Their exports have been hit hard by Covid, and their tourism revenues have evaporated.”
However according to Payne, Omicron risks for the ASEAN region is manageable, as the economies are showing signs of recovery. “Shopping malls in Indonesia have filled up again. Thailand, whose economy depends on tourism for about 18 percent in normal times, reopened to tourists in early November after 18 months of restrictions. Vietnam reopened its largest island to tourists in late November after nearly two years of border closures and an extensive vaccination program.”
ADB recently also raised its economic estimates 0.1 percent to 5.1 percent for Southeast Asia for this year. “Developing Asia’s steady progress in dealing with Covid-19, through continued vaccination drives and more strategic application of containment measures, helped boost growth prospects in the early part of the year,” ADB Acting Chief Economist Joseph Zveglich said in December.
Jupiter’s Nick Payne also expects local economies to recover and investment sentiment to improve if vaccinations in the emerging economies proceed faster. According to him, emerging equity markets have underperformed those of developed markets overall in 2021, mainly due to China.
Tide has turned for corporate earnings across ASEAN
Looking at investment perspectives this year, David Chao, Global Market Strategist at Invesco Asia Pacific, suggests a positive outlook for ASEAN. “Southeast Asian stocks and currencies remain attractive and quite cheap relative to other parts of the region,” he told AsiaFundManagers.com.
In terms of earnings growth, it is likely to continue to strengthen for ASEAN, especially over the next couple of quarters and over this year, Chao adds. “To put it into perspective, for a very long time, ASEAN has been considered a place of weak earnings growth, especially compared to North Asia now. But I think that tide has turned, especially for this year.”
According to Chao, ASEAN corporate earnings revisions have actually outperformed Asia for the last two month, mainly because expectations were too low. For 2022 and also 2023, he further expects positive earnings revision. “What is interesting, if you look at the next two years earnings growth cycle for ASEAN, they’re actually closer to the 2019 pre-pandemic benchmark than most other parts of the Asia region,” adds Chao.
In general, Chao is quite bullish on all ASEAN economies to “a varying degree”, naming Indonesia as a particular bright spot. “Indonesia is attractive in terms of the structural growth story and also the currency has the potential to have the biggest upside in the region. And if we look at stock valuations, it remains one of the cheapest in the region”.
ASEAN set to grow faster than China
Also UK asset manager Waverton expects ASEAN to “fly” and provide exciting investment themes over the next years.
Ian Gisbourne, Analyst and Strategist for Southeast Asia from Waverton, expects not only a strong rebound of the ASEAN-5 economies in 2022, but forecast them to grow faster than China for the first time in a decade.
“We attribute this to a coincidence of positive secular, cyclical and geo-political forces. These forces include demographic and social change, shifting FDI flows, investment in transformative infrastructure, better leveraging of abundant natural resources and emerging disruptive businesses of genuine scale,” he wrote in an ASEAN insight.
According to the Waverton expert, demographic change is driving rapid urbanisation in Southeast Asia, which will change spending habits and create huge demand opportunities in sectors such as infrastructure and housing.
“The investment in infrastructure is a condition for sustainable economic growth which, under the right circumstances, can lead to a virtuous cycle. Urbanisation requires investment in infrastructure.”
The ADB estimated the infrastructure needs of ASEAN for 2016-2030 to be $2.8 trn, rising to $3.1 trn adjusted for climate change. This is equivalent to circa $200bn per year.
“The infrastructure gap, the difference between what countries need to spend and what they are spending, remains in excess of $100 bn per year,” says Gisbourne. “We argue that there is substantial profit to be made from closing the infrastructure gap in Southeast Asia.”
