ASEAN Strategy : Tropical comeback - Deutsche Bank

The ASEAN markets looked almost written off just a few weeks ago during the EM to DM rotation. While some seemed convinced that ASEAN had run its course and that inflationary challenges were going to dismantle all structural positives built up in the last five years, we could not
disagree more.

No capital exodus, debt manageable, food inflation easing and growth intact Let us start with a few key observations.

First, contrary to the perception of some, foreigners did not exit TIPM (Thailand, Indonesia, Philippines, Malaysia) markets in droves in the period from November 2010
to February 2011. Net selling during this period amounted to just US$263m: a negative sign, but not significantly so. The Philippines was the worst hit market with net selling of US$326m, the equivalent of 20% of cumulative net flows in the previous 12 months: again, negative but not
enormous. Indonesia was barely affected, with net selling of just US$130m (-3% vs. the previous 12 months), while Malaysia (+1%) and Thailand (+12%) actually recorded net buying in the period. Even if there was persistent capital outflow, economies like Indonesia and the Philippines are now structurally much stronger and more resilient given the healthy build-up of foreign reserves.

Second, food inflation concerns have abated since early 2011. Commodity prices, especially essential food items like rice and palm oil, have pulled back. ASEAN corporate gearing remains low at 0.23x, offering a sufficient buffer if rates rise too quickly. With the
exception of Malaysia and Singapore, household debt/GDP is low at <30%.

Third, ASEAN valuations may be at a slight premium to historical trends at 13.3x 2011F and 11.4x 2012F PER (vs. Asia ex-ASEAN at respective 11.7x and 10.1x), but EPS growth is superior at 23% and 16.7% (vs. 20.9% and 16.2%).

Our order of preference – Indonesia, Thailand, Malaysia, Singapore.