Investors Shift Focus to Southeast Asia as Inflation Eases and U.S. Rate Cut Looms

Investor interest is surging in Southeast Asia as inflation eases and expectations of a U.S. rate cut rise. The Jakarta Composite Index hit a record high, and Malaysia’s Kuala Lumpur Composite Index reached its highest level since 2020, signaling a strong shift in focus toward these high-growth markets.

Investor Focus Shifts to Southeast Asia as Markets Hit New Highs Amid U.S. Rate Cut Expectations

Investors have begun shifting their focus to high-growth Southeast Asia in pursuit of markets well-positioned to capitalize on decreased inflation as anticipations of a U.S. interest rate cut increase.

According to Nikkei Asia, the Jakarta Composite Index in Indonesia achieved a record high on August 21, marking the latest high in the Southeast Asian stock markets since mid-August. On August 27, Malaysia's Kuala Lumpur Composite Index reached its most significant level since December 2020.

"On inquiries from investors, we have seen a jump in interest of Malaysian stocks," said Paul Chew, head of research at Phillip Securities Research.

The U.S. Federal Reserve's expected rate reduction in September has catalyzed the recent increase in Southeast Asian stocks. At an annual economic conference in Jackson Hole, Wyoming, Federal Reserve Chair Jerome Powell stated on August 23 that the upside risks to inflation have decreased and that "the time has come for policy to adjust."

The currencies of Southeast Asian nations have strengthened against the dollar, reducing the rate disparity between the United States and these countries. Earlier this month, the Malaysian ringgit reached a 16-month high against the U.S. dollar.

The MSCI's dollar-denominated ASEAN Index has increased by 6% thus far in August due to the combined impact of strengthening Southeast Asian currencies and rising stock prices. The S&P 500 index has experienced a mere 2% increase.

The weakening dollar has also generated a tailwind in other emergent markets, including Brazil and South Africa. However, investors have observed the robust development of Southeast Asian economies.

According to the Malaysian Central Bank, the gross domestic product increased by 5.9% from April to June, surpassing market expectations and representing the highest growth rate since the October-December quarter of 2022. Vietnam and Thailand also experienced an increase in growth.

Chew said Malaysia has been the "best-performing ASEAN equity market.” Investors are upbeat about the structural reforms underway in the country.

"In the background are several initiatives to drive more investments into the country, such as data centers, special economic zones and more transport infrastructure," he said.

Southeast Asia Poised for Strong Growth as Global Supply Chains Shift and Investments Surge

According to the World Economic Outlook of the International Monetary Fund, the United States is expected to experience a decline in growth to 1.9% in 2025. In contrast, Malaysia, Indonesia, the Philippines, and India are expected to experience growth rates of 4.4%, 5.1%, 6.2%, and 6.5%, respectively. In the interim, Brazil is expected to experience a 2.4% growth rate, while South Africa and Nigeria are expected to experience 1.2% and 3%, respectively.

The prospects for Southeast Asia are also optimistic in the long term.

According to a joint survey conducted by Singapore-based think tank Angsana Council, U.S. consultancy Bain & Co., and Singapore's DBS Bank, the six leading economies of Southeast Asia are expected to expand at an average annual rate of 5.1% during the 2024-34 period. The development rate of China is anticipated to range from 3.5% to 4.5%. The survey's results indicate that the primary driver of the global economy in Asia is migrating southward from China.

Southeast Asia has reaped the rewards of evolving global supply chains in the context of Sino-American tensions. The increasing import tariffs imposed by the United States on China have impeded Chinese exports to the United States, leading to the relocation of production facilities from China to more geopolitically neutral Southeast Asia.

Indonesia has increased its investment in electric vehicles and E.V. batteries, while Malaysia and Singapore have experienced robust spending on semiconductor devices and data centers. Anwar Ibrahim, the Prime Minister of Malaysia, has positioned his nation as the "most neutral and nonaligned location" for semiconductor production.

Intel, a U.S. chipmaker, has announced its intention to invest 30 billion ringgit ($6.8 billion at current rates) in Malaysia over ten years beginning in 2021. In early August, Infineon Technologies, a German company, expanded its production facilities and commenced the production of next-generation power semiconductors.

Samsung Electronics has invested actively in Vietnam.

In preliminary figures for 2023, foreign direct investment in the ten member nations of ASEAN reached a record of $229.8 billion, with significant increases in Singapore, Vietnam, and Cambodia.

In the past few years, Southeast Asian countries have faced the challenges of a robust dollar and global inflation. Inflation reduced domestic demand, and a weaker domestic currency exacerbated the burden of dollar-denominated debt.

A feeble currency and a lackluster economy precipitated capital outflows from the region. However, the situation changes as inflation stabilizes and the region's currencies appreciate.

"ASEAN markets have lagged North Asian markets like Taiwan and [South] Korea, primarily due to a relative lack of technology stocks," said Jeff Suteesopon, director of portfolio management at LGT Securities (Thailand). "However, if the current optimism surrounding the tech sector takes a pause, we could potentially see increased interest in ASEAN markets."