Over the period shown above, the market\u2019s underperformance versus EM and AxJ equities can be attributed to its country and sector composition. For EM and AxJ equities, performance has been driven by internet and technology stocks found in China, Korea, and Taiwan. In contrast, ASEAN equities are underweight technology and growth stocks, and are materially overweight the financials sector, given the large exposure to banks in Singapore, Indonesia, and Malaysia (Figure 2).<\/p>\n As a result, ASEAN equities have been insulated from the 2021\u201322 China tech crackdown and equity sell-off, and are less sensitive to rising rates, which have impacted the Korea and Taiwan technology sectors. Improving earnings expectations for the region have also helped to offset the drag from a compression in valuation multiples caused by higher inflation and global central bank tightening. ASEAN banks have seen stronger earnings in 2022 as the region\u2019s interest rates moved higher in tandem with the United States\u2019 rates. In addition, the market is overweight other cyclical sectors such as industrials and real estate, which have benefitted as the underlying economies reopen and domestic demand rebounds.<\/p>\n ASEAN\u2019s sectoral overweight to financials and its underweight to growth and technology sectors imply that corporate profitability has lagged that of its EM and AxJ counterparts in recent years. As of 31 December 2022, the trailing 12-month return on equity to ASEAN equities was 9.4%, versus 12.9% for EM equities and 10.6% for AxJ equities.<\/p>\n However, as discussed earlier, earnings growth for ASEAN equities had been more resilient in 2022 and forecast to remain so in 2023. Banking profits are holding up, while broader ASEAN equities have been supported by the reopening of the tourism sectors and a rise in commodity prices, which is favourable for commodity-exporting countries, such as Malaysia and Indonesia. Analysts forecast ASEAN earnings per share to grow 31.1% in USD terms in calendar year 2022 and 14.3% for 2023, significantly higher than their global counterparts (Figure 3).<\/p>\n Unlike in 2013, when valuations for ASEAN equities were at elevated levels, valuations are now at low levels in part due to the past few years of muted performance. ASEAN equities currently trade at an average return on equity\u2013adjusted price-earnings (P\/E) of 14.2 times, which is the 27th percentile of historical observations. Valuations relative to global equities also remain low at the 29th percentile of historical observations (Figure 4). While there is dispersion at the country level, absolute valuations for all regions are below the historical median except Thailand, which trades close to fair value. Given the past few years of political turmoil, valuations for Malaysian equities are depressed at the 8th percentile. However, there is upside market potential if newly appointed Prime Minister Anwar Ibrahim can maintain stability within his coalition government and drive investor confidence.<\/p>\n While the dataset for ASEAN equities is relatively limited, the market is very sensitive to global economic downturns and valuations have collapsed during these instances, such as in 2001, 2008 and 2020, before rebounding sharply (let alone 1997\u201398 when Southeast Asia was the epicenter of the Asian Financial Crisis). Valuations relative to global equities, on the other hand, have tended to move in longer cycles. Current levels of valuations, both in absolute and relative terms, suggest that there could be further upside to ASEAN equities in the near term, barring any global recessionary shocks.<\/p>\n For ASEAN equities, the currency component is also a factor for consideration. ASEAN currencies were hit hard during the 2013 taper tantrum due to foreign investor outflows, and one would expect them to face similar pressure amid the Fed tightening regime. Over 2022, ASEAN currencies were indeed down 5.1% on average against the US dollar, although this compares favourably to the euro (-6.2%), pound (-11.2%), and yen (-12.7%). The Singapore dollar in particular managed to appreciate 0.5% against the US dollar in 2022, as the Monetary Authority of Singapore aggressively tightened policy to combat rising inflation.<\/p>\n Whether ASEAN currencies can remain supported is a question. On the one hand, real exchange rate valuations for ASEAN currencies versus the US dollar have declined from the elevated levels seen in 2013 (Figure 5), and the currency basket now looks cheap relative to history. The region\u2019s current accounts should remain supported by the continued reopening of ASEAN\u2019s tourism sectors, as well as a rebound in the Chinese economy and demand following the lifting of its zero-COVID policy. However, real-yield differentials between ASEAN and the United States have narrowed in recent months, which could erode the support for ASEAN currencies. This comes as inflation in the region ticked up over second half 2022, and as the Fed moved aggressively to tighten policy, while some ASEAN central banks (e.g., Bank Indonesia and Bank of Thailand) were slower to do so, given their focus on economic recovery.<\/p>\n![\"\"](\"https:\/\/publishedresearch.cambridgeassociates.com\/wp-content\/uploads\/2023\/02\/ASEAN-Equities-1.png\")
<\/a><\/p>\n![\"\"](\"https:\/\/publishedresearch.cambridgeassociates.com\/wp-content\/uploads\/2023\/02\/ASEAN-Equities-2.png\")
<\/a><\/p>\nEarnings Outlook<\/h3>\n
![\"\"](\"https:\/\/publishedresearch.cambridgeassociates.com\/wp-content\/uploads\/2023\/02\/ASEAN-Equities-3.png\")
<\/a><\/p>\nValuations Have Risen Slightly, but Remain Favourable<\/h3>\n
![\"\"](\"https:\/\/publishedresearch.cambridgeassociates.com\/wp-content\/uploads\/2023\/02\/ASEAN-Equities-4.png\")
<\/a><\/p>\nCurrency Impact<\/h3>\n
![\"\"](\"https:\/\/publishedresearch.cambridgeassociates.com\/wp-content\/uploads\/2023\/02\/ASEAN-Equities-5.png\")
<\/a><\/p>\n![\"\"](\"https:\/\/publishedresearch.cambridgeassociates.com\/wp-content\/uploads\/2023\/02\/ASEAN-Equities-6.png\")
<\/a><\/p>\n