Small Asian economies that are closely tied to interest rates set by the United States Federal Reserve have share markets that are underpriced, but will rebound strongly when rates are eventually cut further, according to an investment specialist focused on the region.
Man GLG head of Asian equities ex-Japan Andrew Swan said a number of economies in southern Asia have not taken action to boost their economies due to concerns that lowering interest rates will impact them negatively, despite having low levels of inflation.
“It’s the small markets where you actually have very good economic growth, but a lot of these markets have derated because the central banks in these smaller countries are hostage to the Fed,” Swan said during a recent media briefing hosted by investment firm GSFM.
“They really can’t do anything with their own monetary policy due to the fear of outflows and the reason that’s important is these countries don’t have an inflation problem, whereas the US has had an inflation problem.
“This means the Fed has run high interest rates when the smaller countries would actually like to be cutting interest rates. So once the Fed starts to cut, the smaller countries will cut rates and they will get an injection to the economy again at a time when growth is pretty good and there is no inflation.”
He said Asian shares as an asset class have been out of favour for a long time and are now cheap and under-owned, but are turning and the primary beneficiaries of this shift are places such as the Philippines and Indonesia.
“Interest rates haven’t moved even though inflation is at the low end of its historical range,” he said.
“Despite these rates being higher than where they should be, these economies are still doing very well.
“They would love to cut rates right now, but can’t until the Fed moves because if they move first, you will see outflows and that will depreciate their currency quickly and create inflation again.
“When rates are getting cut, these markets will expand in terms of their economies, corporate profitability and also price-to-earnings multiples and we are on the verge of very strong returns in places like the Philippines and Indonesia.
“The sectors which will benefit and are the primary way to play the economy in these markets is through financials, so banks in particular, real estate, which will benefit from lower rates, and some consumer spending, but financials are generally the best way to focus [in emerging markets].”
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