And investors will be looking for the emerging opportunities to explore as we enter this new market environment.
When debating the outcome of this election from an Asian markets perspective, we always come back to fundamentals: they drive longer-term returns more than temporary shifts in the markets. Therefore, our focus is on those sectors with the greatest organic growth opportunities, those that align with government policy initiatives and have the potential for increasing domestic demand.
Asia presents a vibrant landscape for equity investment as the outlook for earnings has improved recently across a broader range of markets and sectors. Supportive policy measures announced in China to stabilise the country’s economy, along with rate cuts by the US Federal Reserve, offer a more favourable backdrop for regional markets as market breadth increases beyond a concentrated group of stocks.
Like the US, market leadership in Asia has become narrower since mid-2022. The market cap index of MSCI AC Asia ex Japan outperformed the equal weight index as investors focused their capital on large cap and tech-driven companies while paying less attention to the sizable part of the investment universe. However, we have seen this market narrowing trend begin to reverse since September 2024 as the gap between market cap index and equal weight index has contracted. What this means is market leadership has started to broaden, which brings with it opportunities within Asia’s vibrant and diverse investment landscape.
In the last three months, the outlook for earnings has improved across a broader range of markets and sectors in the region. At the market level, several members in the Association of Southeast Asian Nations (ASEAN) – such as the Philippines, Singapore, Malaysia, and Thailand – have received positive forward earnings revisions for the next 12 months. This is being spread across a number of sectors.
ASEAN has long offered a diverse and attractive investment landscape. Young demographics, a competitive labour force, rising urbanisation and a growing middle class in member countries such as Indonesia and the Philippines underpin long-term structural demand trends which are expected to drive consumption upgrade and economic growth. However, the shorter-term prospects have been less convincing in recent years.
After a couple of lacklustre performance years, investor confidence towards ASEAN has significantly improved thanks to the Federal Reserve’s rate-cutting cycle, which is seen as positive for the region as a weakened dollar alleviates pressure on local currencies and creates room for ASEAN countries’ own monetary easing. On top of that, China’s policy stimulus has further boosted market sentiment as more investment capital is expected to be directed to the ASEAN region as the manufacturing base in China diversifies into the region.
ASEAN economies attracting significant foreign direct investment (FDI) continues to be a multi-year trend, particularly in sectors like manufacturing and technology. Companies are seeking to leverage lower-cost production bases and engage in major themes for the next decade, such as the EV supply chain, strategic materials and data centres.
Supply chain shifts towards ASEAN markets, including Malaysia and Vietnam, are further bolstered by the region’s strategic location and infrastructure development, making it an attractive hub for global trade. Some garment manufacturers, toy makers, smartphone supply chain participants, automation manufacturing and technology solutions providers, and metal miners are among noteworthy investment opportunities for the FDI and supply chain shift trend, while leading regional banks facilitate the flow of capital into and across ASEAN.
Furthermore, several ASEAN countries are experiencing a near-term demand recovery, particularly in the tourism sector. Thailand, for example, has seen a resurgence in tourist activity nearly back to pre-pandemic levels, which is expected to boost local businesses and stimulate economic growth.
Some potential investment opportunities include convenience chain stores and international medical services. Additionally, the easing of cost pressures in ASEAN countries is making them more competitive in the global market, thereby enhancing their attractiveness to investors.
As a whole, ASEAN equities are gaining traction from global investors, backed by a combination of a positive economic outlook, stable political outlook, and currency appreciation. Moreover, relative to other parts of the Asian region, ASEAN equities remain attractively valued both on price to earning as well as price-to-book basis at current levels, offering an interesting investment window for long-term investors now.
While well-supported by structural growth prospects, the region remains an under-researched investment universe. Collectively, these factors create a compelling case for investment in ASEAN, with its mix of short-term opportunities and long-term growth prospects.
Marty Dropkin, head of equities, Asia Pacific, Fidelity International
