Navigating Asean's markets in H2: A balanced approach for a mixed outlook

Business Times

2 days ago

GOING into the second half of the year, we see the market landscape of Asean presenting a mixed bag of opportunities and challenges. While monetary easing and clarity on US trade policies promise a brighter outlook for equities, lingering uncertainties may still affect earnings. With the probability of a US and global economic recession hovering at an elevated 40 per cent, challenges remain for economies from the Association of Southeast Asian Nations (Asean).
The market's focus has been on reciprocal tariffs, but the game changer for Asean may be the outcome for exemptions on semiconductors, pharmaceuticals, and certain commodities – whether they will be sustained. For countries like Malaysia and Singapore, where 60 per cent of exports enjoy tariff exemptions, the ongoing investigations under Section 232 of the Trade Expansion Act of 1962 will also play a crucial role in raising the baseline for tariffs for the region.
Monetary policy: a beacon of hope
Rate cuts are expected to provide relief to sectors such as real estate and consumer staples, enhancing liquidity and spurring investment. For instance, Singapore's strategic S$NEER slope reductions have already lowered borrowing costs, benefiting real estate investment trusts (Reits) and potentially boosting local equity fund subscriptions.
The Philippines, too, is poised for multiple rate cuts, with expectations of two more 25 basis point reductions. This move could lead to equity re-rating and bolster growth in consumer credit and real estate sectors.
Trade policy clarity: a catalyst for confidence
Clarity in trade policy could further bolster market performance. The recent US-Vietnam deal, which significantly reduced tariffs on domestically produced goods to 20 per cent, offers a blueprint for other Asean nations.
This two-tier tariff system, with higher tariffs on transshipment goods and lower country-level tariffs, provides a clearer framework for trade negotiations. Such clarity could boost investor confidence and attract positive foreign direct investment flows into the region.
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Indonesia and the Philippines had also agreed on a similar tariffs rate (19 per cent) with the US. Anticipation of similar deals for Thailand and Malaysia could further enhance investor confidence. Vietnam's stock market, for instance, has already rallied by over 9 per cent month-to-date. With strong government fiscal support and the potential reclassification of Vietnam to Emerging Market status on the FTSE in September, we have recently upgraded the country's market allocation from neutral to overweight. We expect this upgrade to attract more than US$500 million in inflows and spur positive sentiment in the stock market.
Sectoral opportunities amid uncertainties
In this evolving landscape, industrial real estate, ports, logistics companies, and tech producers emerge as sectors to watch. Vietnam's emphasis on science and technology development, coupled with infrastructure projects, positions its industrial and construction sectors for sustained growth.
In the Philippines, the property market is poised for recovery, driven by attractive mortgage rates and infrastructure improvements. Reduced unsold inventory and lower vacancy rates in key CBD offices could also potentially drive positive rental reversion in 2026.
In Singapore, sharp interest-rate cuts, high dividend yields and the Equity Market Development Programme make Reits and small to mid-cap stocks attractive.
Navigating the challenges
However, the path is not without hurdles. Persistent US inflation poses a downside risk for equities in the region.
Rising terminal policy rate expectations, higher term premia and poor supply demand dynamics could lead to a substantial increase in US 10-year yields, prompting a reassessment of discounted cash flows and cross-asset volatility. This risk is particularly acute for manufacturing and export-oriented economies within Asean, which are highly exposed to global demand fluctuations.
Geopolitical tensions continue to cast a pall over markets, with rising protectionism and trade wars disrupting economic stability and investor confidence. The ongoing scrutiny of transshipment practices and sectoral exemptions, such as those for semiconductors and pharmaceuticals, adds layers of complexity to trade negotiations and economic forecasts.
With 'Liberation Day' tariffs set to take effect on Aug 1 for Asean countries that received Trump's letters, uncertainty looms large. Even if agreements are reached, effective tariffs are likely to settle higher than the current 10 per cent holding rate, with additional sectoral tariffs posing another downside risk.
A balanced approach to growth
In conclusion, while Asean grapples with global recession risks and geopolitical uncertainties, opportunities for growth remain through strategic monetary easing and trade policy advancements.
Investors should adopt a balanced approach to risk management and investment strategy, focusing on high-quality, defensive assets with greater domestic exposure.
The writer is head of Asia & co-head of global emerging markets equity strategy at JPMorgan