Tip markets seen as shelter in event of global slowdown
The counter-cyclical economies of Thailand, Indonesia and the Philippines (Tip) could prove to be a golden triangle ahead of an expected global economic slowdown, according to ABN Amro.
The brokerage upgraded the three markets to 'overweight' owing to low valuations, diminishing political risks, and relatively few shareholdings by foreigners, saying the markets should sail through any potential turbulence in the face of a global fiscal tightening cycle.
'We believe the Tip markets are likely to be relatively sheltered from an anticipated slowdown in the global growth cycle,' says analyst Ben Rudd. 'Valuations in the Tips markets are among the most attractive in the region in terms of both yields and earnings.'
So far this year Indonesia is up 10 per cent, Philippines 5 per cent, while Thailand fell 15 per cent, but all three markets have outperformed the region in the second quarter. Mr Rudd believes they should continue to do well in the second half in view of favourable election results in the Philippines and Indonesia.
'The outlook for domestic investment has improved significantly and we expect investment spending to surprise on the upside in the second half, which could act as a catalyst to attract foreign investors back into these waters,' Mr Rudd says.
Among the three, Indonesia looks the most attractive on a valuation basis, ranking as the third highest-yielding market in the world, while Thailand consensus expectations are low following aggressive downgrades in recent months. Bangkok crashed 25 per cent in the first quarter after huge gains last year earned it the reputation as one of the best performing markets globally. The Philippines appears the least exposed to foreign selling, given that fund managers have been aggressively dumping shares for two years.
Investment approvals are at record highs for both Thailand and the Philippines, while Indonesia has issued 50 per cent more project approvals in annual terms.
ABN Amro believes the global economic cycle has peaked and will begin to face the headwinds of fiscal tightening, a slowing US economy in the aftermath of the presidential elections, and slowing demand.
'If anything, what we are already seeing is the slowdown is coming through sooner rather than later,' Mr Rudd says. 'We are still looking for a more pronounced slowdown in the Chinese economy, particularly earnings risk coming through in the basic materials.'
The export-oriented economies such as Taiwan and China are particularly vulnerable.
'Earning expectations remain strong, leaving them vulnerable to significant downgrades over the next six months,' Mr Rudd says.
The brokerage believes H shares could tumble as much as 40 per cent, but it is optimistic on the outlook for the Hong Kong stock market because of dollar weakness and low interest rates.
Mr Rudd says the Tips economies have a different dynamic which is geared towards internal consumption through domestic investment that should insulate them from declining exports.
'Earnings downgrades in Tips markets will likely be more muted because expectations seem more realistic,' he says. 'Thailand looks the best because growth expectations are so low and they are clearly picking up.'
Consensus earnings forecasts for the year ahead are 7 per cent for Thailand, 17 per cent for Indonesia and 24 per cent for Philippines.
Mr Rudd says Asian markets could face a capital flight if the global economy goes into a marked slump, as global investors are overweight the region.
