Alexander Redman, Chief Equity Strategist at CLSA, says ASEAN equities remain “hostage” to the global semiconductor cycle and the dominant AI trade, a dynamic that has left the region trailing other Asian markets.
Speaking in a recent session, Redman noted that ASEAN’s limited exposure to technology stocks has caused it to lag behind markets such as those in other Asia markets, which continue to benefit from strong momentum tied to artificial intelligence and semiconductor demand.
According to Redman, ASEAN’s post-pandemic performance has increasingly diverged from the broader Asia-Pacific region. The region’s sector composition—heavily weighted toward financials—has fallen “out of fashion,” while forecasts for return on equity (ROE) and earnings growth remain weaker than those of regional peers.
Although markets such as Indonesia, Singapore and Malaysia offer relatively high dividend yields, the broader investment narrative remains unconvincing for global investors. Meanwhile, the rest of ASEAN offers less profitability and value-creation.
Country Views
- Singapore: Previously a favored investment destination, Singapore is now facing slower non-oil domestic export momentum and declining bank ROEs. Redman has shifted to a tactical overweight stance, primarily as a temporary hedge against Middle East tensions, while saying that the market is now “expensive”.
- Malaysia: Despite maintaining a structural underweight due to more than a decade of deteriorating value creation, Malaysia is currently viewed as a defensive “hiding place” when other markets are negative.
- Thailand: A rally following a stable election briefly reduced political uncertainty. However, the valuation discount disappeared quickly, pushing the market from “cheap” to “expensive” in just seven weeks. Still, he is thinking of reconsidering his “Underweight” position in Thailand. Following a surprise rate cut, he pointed out that there is no room for the Bank of Thailand to cut rates further.
- Indonesia: While the country benefits from favorable demographics, recent sovereign rating downgrades and governance concerns have triggered what Redman describes as a “foreign exodus.” With foreign ownership estimated at 50–60%, the market remains highly sensitive to shifts in global emerging-market sentiment, especially with MSCI reviewing its rating on Indonesia.
During the Q&A session, Redman provided a detailed analysis of the recent capital flight from Indonesia, a market he describes as typically being the “most overloved” by emerging market investors due to its demographic dividend, urbanization, and potential for credit growth. Despite these structural advantages, the market is currently grappling with a “solid foreign exodus”.
Redman identified several critical factors driving this trend:
- Extreme Foreign Sensitivity: Indonesia is one of the most foreign-owned markets in the region, with foreigners holding between 50% and 60% of the equity. Consequently, when global investors retreat from emerging markets, Indonesia is particularly vulnerable, as domestic investors lack the scale to compensate for the selling pressure.
- Governance and Administration Shift: A significant driver of the current discomfort is a perceived decline in governance standards. While investors felt confident under the former Joko Widodo administration, the current leadership has been associated with “several own goals” that have made markets uneasy. This has led to sovereign rating outlook downgrades by agencies such as Fitch and Moody’s.
- MSCI and Structural Headwinds: Since late January, Indonesia has faced a “slew of bad news,” including investigations into free floats and threats to its frontier status by MSCI, which could lead to a reduction in its index weighting.
- The Index Performance Gap: Redman highlighted a stark divergence between the local JCI (Indonesia’s main stock market index), which has actually outperformed Asia-Pacific in US dollar terms, and the MSCI Indonesia index, which has “underperformed tragically” due to differing methodologies and inclusions.
