As the Federal Reserve is on the cusp of its first rate cut in four years, not only has the Indian stock market recently hit new highs, but Southeast Asian stocks and bonds have also garnered global investor favor.
Concurrently, multiple assets in emerging markets have been on an upward trajectory due to the anticipated Fed rate cut.
Many analysts believe that emerging markets as a whole will benefit from the Federal Reserve's rate reduction.
Southeast Asian assets, favored by global investors, have seen overseas funds flowing into the region's stock markets for the fifth consecutive week, propelling the MSCI Asean Index close to its highest level since April 2022.
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Since the beginning of July, the index has outperformed the MSCI Asia Pacific Index by approximately 14 percentage points.
Among the top five best-performing Asian stock markets in September, four are from Southeast Asia, with Thailand's stock market leading the pack.
Last week, among the main Southeast Asian stock indices, the Indonesia Stock Exchange (JKSE) rose by 1.17% or 90.28 points, closing at 7,812.13 points; the Kuala Lumpur Composite Index in Malaysia slightly fell by 0.06%, reporting at 1,652.15 points; the Philippine Stock Exchange Index in Manila increased by 1.25%, standing at 7,022.85 points; the Stock Exchange of Thailand (SET) index slightly dipped by 0.23%, closing at 1,424.39 points; and the Ho Chi Minh City Stock Exchange (VN-Index) in Vietnam fell by 1.3%, closing at 1,267.73 points.
The main factors driving global investor optimism towards Southeast Asian stock markets include supportive local policies, attractive valuations, and relatively low positions held by foreign investors.
In the realm of supportive policies, Kenneth Tang, Portfolio Manager at Nikko AM Shenton Thrift Fund, stated that Indonesia's fiscal easing, and measures by Thailand and Malaysia to encourage investors to hold shares through the introduction of more Deposit Receipts (DR) and Exchange-Traded Funds (ETFs), have driven foreign interest in these economies' stock markets.
Industries sensitive to interest rates and offering high returns, such as real estate and banking, are set to benefit significantly.
Last month, Nomura Holdings upgraded its stock ratings for Malaysia and Indonesia.
This month, Goldman Sachs also upgraded Thailand's stock ratings due to supportive policies.
The bank's strategist, Timothy Moe, wrote in a research report that Thailand's newly established state-controlled Vayupak Fund is expected to provide "emotional and liquidity support to attract foreign capital back to the country."
Another reason overseas funds are bullish on Southeast Asian stock markets is valuations and positions.
The MSCI Asean Index's 12-month forward price-to-earnings ratio stands at 13.6 times, below the five-year average of 14.7 times.
John Foo, founder of Valverde Investment Partners Pte, said, "After being neglected for so long, global investors are beginning to realize that there are many investment opportunities in Southeast Asian stock markets to capture alpha, such as commodity companies in Indonesia, technology companies in Malaysia, and export companies in Vietnam."
Additionally, the central banks of Southeast Asian economies may follow the Federal Reserve's rate cut, which also bodes well for their asset prospects.
The Philippines took the lead in cutting rates in August, and Indonesia's current real policy interest rate is 4.1%, providing ample policy space for the country's central bank to cut rates.
Beyond the stock market, according to media data, global fund managers have also been continuously increasing their holdings of Thai, Indonesian, and Malaysian sovereign bonds over the past two months.
Joevin Teo Chin-Ker, Head of Investments at Amundi Singapore, said that in the long run, he is optimistic about high-yield bonds and money markets in Southeast Asia.
Neeraj Seth, Head of Asian Fixed Income at BlackRock in Singapore, also said that potential rate cuts by the Federal Reserve and central banks in Southeast Asian countries will boost the region's bonds, and recent fluctuations may provide buying opportunities.
Specifically, he is most optimistic about medium to long-term bonds in the Philippines and Indonesia, as the central banks of both countries have more room to ease monetary policy.
Zhang Haoen, Head of Personal and Commercial Banking Business Investment at Industrial Bank International, also said that the Federal Reserve's upcoming rate cut cycle will be beneficial to emerging market bond investments, especially in Asia, where capital inflows will further heat up the Asian bond market.
Among them, countries with good economic fundamentals and sufficient foreign exchange reserves, such as Vietnam, are likely to become the preferred choice for investors.
Chun Hong Lee, Portfolio Manager at Principal Asset Management, said, "As the Federal Reserve starts its rate cut cycle, the upward trend in Southeast Asian stocks and bonds may continue until the end of next year, as long as there is no recession."
In fact, the recent capital inflows and stock price increases in Southeast Asia are just a microcosm of emerging markets.
More significant valuation advantages and rate cut space have amplified the attractiveness of the region's assets in the entire emerging market, but overall, all emerging market assets will benefit in the environment of the Federal Reserve's rate cuts.
During the Federal Reserve's last rate cut cycle in 2020, emerging market stock indices rose by 16%.
As of Tuesday (September 17), the MSCI Emerging Markets Stock Index has risen for the fourth consecutive day, recording the longest streak in over a month.
The MSCI Emerging Markets Currency Index has also risen for the fifth consecutive day, with the Malaysian Ringgit, Indonesian Rupiah, and Philippine Peso leading the way on Tuesday.
Even with recent increases, the overall real effective exchange rate of Southeast Asian currencies is still 1.8% lower than the 10-year average.
In contrast, emerging market currencies in Latin America, Europe, the Middle East, and Africa have been overvalued.
Therefore, Southeast Asian currencies have seen a stronger recent uptrend.
FXTM's Chief Chinese Market Analyst, Yang Ao, told First Financial Daily that not only is the Federal Reserve likely to cut rates in September, but seven central banks around the world will announce interest rate decisions, with five of them—the Federal Reserve, the European Central Bank, the Swiss National Bank, the Riksbank, and the Bank of Canada—either having cut rates or expected to cut rates.
Regarding the Federal Reserve's rate cut, he said, "The market expects the US dollar to weaken with the rate cut.
If the Federal Reserve cuts rates 2-3 times by the end of the year, each time by 25 basis points, the US dollar index may weaken below 100 by the end of the year.
Capital will then start to flow out of US dollar assets and into some emerging market stocks."
PGIM Fixed Income, in a pre-Federal Reserve rate cut outlook report sent to First Financial Daily, expressed optimism about various bonds in emerging markets.
The institution's analyst team said that last week, the spreads of hard currency bonds in emerging markets remained resilient, with the best-performing US dollar and euro hard currency emerging market bonds coming from Argentina, Sri Lanka, Senegal, Ecuador, and Bolivia.
Except for the weakest issuers, the spreads of all issuers remained near long-term averages.
In a favorable macro outlook, emerging markets should benefit from the Federal Reserve's rate cut cycle.
Looking ahead, as more major emerging market elections approach, in addition to the Federal Reserve's rate cut, investors will also pay attention to the election results and the top-down policy measures that result from them and their impact on the market.
In terms of local currency sovereign debt, the bank said that Mexico, Colombia, Chile, Peru, and Poland performed best last week, while Turkey, Brazil, South Africa, the Czech Republic, and the Philippines lagged behind.
Overall, after a poor performance at the beginning of the third quarter, the rebound of emerging market local currency bonds has gradually caught up with US Treasury bonds.
In the corporate debt of emerging markets, although the yields and spreads have approached fair levels, the fundamentals remain resilient.
Although the total issuance volume in recent times has been higher than market expectations, the net supply volume is still negative.
The bank believes that BB-rated corporate bonds in emerging markets are the most investment-worthy, and BBB-rated long-term bonds are also investable.
Barclays, in its quarterly macro strategy report on emerging markets sent to reporters, also said that for most of this year, emerging market assets have been constrained by Federal Reserve policy.
But as the Federal Reserve is about to cut rates, the situation is changing rapidly.
The Federal Reserve's shift to a more moderately loose stance is enough to support the recent repricing of emerging market interest rates, and in some countries, it has been factored into asset price increases, such as in Mexico, the Czech Republic, Israel, and India.
At the same time, Barclays believes that the impact of the Federal Reserve on emerging market policies is declining.
With the Federal Reserve's interest rate pressure easing, slow global growth, and controlled global commodity inflation, central banks in emerging markets may prioritize more accommodative policies over strong currencies.
Therefore, during this round of the Federal Reserve's rate cuts, there is room for divergence between emerging market bonds and emerging market foreign exchange, and the performance of bonds may outperform foreign exchange.
That is to say, as most central banks in emerging markets follow the Federal Reserve in cutting rates, the return on carry trade transactions will decrease, and risk fluctuations may push up the US dollar's exchange rate against emerging market currencies, especially when the current emerging market foreign exchange market reflects a low premium for the risk of economic recession.
In terms of foreign exchange, Barclays' analyst team expects that after the recent position adjustment caused the US dollar to fall against the Chinese yuan, there may be a certain rebound, but the extent will be limited and it is unlikely to break through 7.10.