Asean markets: green energy and fintech can provide the impetus for a strong rebound in 2022

As Southeast Asian economies begin their post-pandemic recovery, stock markets are set to offer solid earnings growth
New trends are emerging as a result of Asean’s transition from the traditional to the new economy, with opportunities in a wide range of sectors

Chaoping Zhu

Published: 1:30pm, 31 Dec 2021

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Asean stock markets have suffered this year as a result of slow vaccine roll-outs and sluggish economic recovery, underperforming their global peers. From the start of the year to December 29, the MSCI Asean index declined by 3.3 per cent, in contrast with the 17 per cent return from the MSCI ACWI, the index tracking stock markets around the world.

With a long-anticipated move towards non-US markets as the global economic recovery widens, can we finally look to the Association of Southeast Asian Nations for better investment opportunities in 2022?

With vaccination rates picking up in recent months, if local governments start easing pandemic control measures in the new year, there is a high probability of a strong rebound in Asean equities on the basis of attractive valuations and prospects for solid earnings growth.

The ongoing reflation and economic reopening could help boost earnings expectations, especially in sectors focused on domestic demand.

Moreover, given the large scale of Asean’s local market, as well as its unique natural resources, there are plenty of investment themes with strong long-term growth potential.

Specifically, new trends are emerging as a result of the transition from the traditional to the new economy. Asean is where old meets new, with opportunities spanning a wide range of sectors.

Raw materials is one to highlight amid the worldwide transition from fossil fuels to renewable energy. Indonesia supplies one-third of the world’s nickel, a key material for making electric vehicle batteries.

As global demand for electric vehicles grows, Indonesia will become increasingly important in the supply chain.

While the country has been exporting nickel ore and other raw commodities, the Indonesian government has begun to realise the value of creating a downstream industry for the country’s mining resources.

A worker mans a furnace at a nickel smelting plant in Soroako, on Indonesia’s South Sulawesi island. Photo: AFP

It has imposed aggressive restrictions on nickel ore exports and made more investments to attract electric vehicle supply-chain manufacturers to set up plants in Indonesia, with the hope of establishing its own supply chain locally.

The buildout of such an ecosystem is expected to significantly boost local productivity and domestic demand in most economic sectors.

Financial deepening through digital innovation is another example of old-meets-new opportunities emerging in Asean.

Banking is viewed as an old and less innovative sector. However, quality financial services firms in the region are embracing a digital transformation to capitalise on the take-off of the region’s financial inclusion, given that its overall penetration rates remain low compared to developed markets.

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Some local banks have been installing technology to lower service costs and expand customer reach. As a result, these banks are expected to increase their market share in a region that already has strong secular growth.

Telecom services, deemed as old economy in some developed markets, are also riding on the new economy wave in Asean. Telecom companies are diversifying away from traditional services and accelerating digital adoption across the region.

Some have repositioned themselves as notable fintech players by developing new lines of business such as e-wallet platforms.

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In the Philippines, where there is a structural economic reliance on remittances due to the inefficient banking system, telecom companies have been developing e-wallets since the early 2000s.

The adoption of e-wallets has accelerated during the pandemic as a result of a change in consumer behaviour, with less resistance and greater acceptance of new technologies. As such, Philippine telecom companies now dominate the country’s e-payment space, just like the online payment giants in China.

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Admittedly, the US Federal Reserve’s policy tightening is likely to affect Asian markets, especially if higher US dollar rates lead to a stronger dollar exchange rate, which could put pressure on emerging markets and Asian assets, including equities.

However, the Fed is likely to communicate well with markets to prevent sharp swings in bond yields, interest rates and exchange rates, and hence the impact on Asian markets should be limited. Moreover, “old meets new” is a long-term theme, and is likely to weather any short-term market volatility.

As a result, the underperformance of and dampened valuations seen in Asean markets could be an attractive entry point for investors looking long term.

Chaoping Zhu is a Shanghai-based global market strategist at JP Morgan Asset Management

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