This article first appeared in The Edge Malaysia Weekly on May 23, 2022 - May 29, 2022

A strong US dollar poses obvious challenges for most emerging markets, particularly those shouldering hefty foreign currency debt. Yet, investment experts contacted say most economies in Southeast Asia, including Malaysia, remain attractive for their economic growth potential as the world reopens post-pandemic, though things will not be smooth sailing in the near term as markets digest a very hawkish stance by US Federal Reserve.

Historically, Asean markets have had mixed reactions to the past four periods of strong US dollar cycles since 1980, stock market data for the past four decades shows.

Malaysia did not do well in all four periods, recording negative returns ranging from 2.4% (June 2021 to May 2022) to as much as 29% (April 2008 to March 2009) (see table).

Thailand, the Philippines and Vietnam also incurred losses in almost all the strong US dollar periods, except for the May 2014 to December 2016 period, during which their markets grew 8.5%, 1.5% and 17.5% respectively. For June 2021 to May 2022, Malaysia, Thailand, the Philippines and Vietnam lost 2.4%, 0.2%, 0.2% and 5.7% respectively.

Indonesia, which chalked up a 14.7% gain for the June 2021 to May 2022 period, lost 30.9% in the February 2018 to March 2020 period and gave up 37.6% during the April 2008 to March 2009 period.

Singapore, the only other Asean market to have a positive return during the reviewed period of US dollar strengthening, saw negative returns of 46.4% (April 2008 to March 2009) and 27.4% (February 2018 to March 2020).

Measured from the start of the year, the ringgit had weakened 5.8% against the greenback at the time of writing, underperforming other currencies in the region that had eased between 0.8% and 3.1% over the same period.

Still, there may well be opportunities to profit while others are fearful.

Regional private equity investor and former dealer Ian Yoong tells The Edge it could be a tumultuous ride, with more negative newsflow ahead — ranging from high inflation and souring energy costs to global food shortages — weighing on portfolios. He advises investors to have a diversified portfolio in terms of sector, currency and geography and reckons that clearer skies may come only by the second or third quarter of 2023.

Even so, Yoong says Southeast Asia is still the place to invest in in the coming decade, thanks to excellent demographics with a large young population and good work ethics. Those familiar with the region would also be well acquainted with the countries with higher risks from politics and economic mismanagement.

Pankaj C Kumar, a former head of research and fund manager, agrees that the growth momentum and investment opportunities remain abundant in Southeast Asia.

For investors who want exposure outside Malaysia to avoid single-country risk, LeInves PLT chief investment officer William Ng suggests looking for Malaysian firms that have exposure in emerging markets such as Indonesia and Vietnam. Some Malaysian manufacturing firms, for instance, have set up plants in Vietnam to manage risks, including those worker-related.

While Singapore has always been a top choice when it comes to investing in foreign markets, Ng says its stock market is more suitable for long-term investors because of stricter rules and regulations. “The market is dominated by long-term investors with less speculative activity, so it is less volatile,” he explains.

Though the glove, plantation, furniture and semiconductor industries are seen as the beneficiaries of a weak ringgit, Ng stresses that factors such as skyrocketing raw material prices and labour shortage need to be considered. “In this case, palm oil is the pure export sector, but it looks a bit neutral because of the labour issue.”

The head of a local research house who declined to be named says commodity and finance are the two main themes for investing in Southeast Asia. “Commodity is still the key for markets like Malaysia and Indonesia, although some say prices could come down substantially when the Russia-Ukraine war is over. And as the reopening momentum picks up, banks are a safe bet.”

While financial results thus far have been satisfactory this year against 2021, Yoong does not rule out the possibility of corporate earnings of regional firms declining in the second half of 2022, owing to inflation caused by supply shortages as well as weak currencies.

“I expect corporate earnings of the majority of listed companies to taper off in 2023, with higher raw material prices and wage inflation. The tremendous potential of the Southeast Asian economies is in the medium to long term. The best investment opportunities present themselves when fear is greatest.”

With growth projected to pick up once economic recovery gains pace, Ng believes the momentum will translate into a rise in corporate earnings for Asean firms — despite the short-term blip from high inflation and forex volatility.

He says: “Asean is getting more important for global superpowers. At the same time, regional corporates need to look for a more balanced trading policy. They can source raw materials from other places and not necessarily have to use the US dollar for transactions.”

There are still undervalued gems for those who care to do their homework.

Yoong points out that many small- and mid-cap stocks — especially those involved in the technology manufacturing sector — in Singapore and Hong Kong are very undervalued because of low institutional and retail investor interest.

He says: “Many listed companies are trading at earnings multiples in the low teens and respectable returns on equity.”

As commodity companies stand to benefit from inflation, the energy crisis and the global food shortage — which will persist for at least a year until demand destruction sets in — Yoong says that small- and mid-cap plantation stocks will be fairly attractive in the next 12 months.

He also favours oil and gas services companies with sound balance sheets that are mainly dependent on Petroliam Nasional Bhd (Petronas) and other upstream companies in Malaysia.

He says: “These companies have been in the doldrums since 2016. Petronas will most likely increase its capital expenditure for 2023, with oil price expected to stay above US$80 for the next two to three years. The oil and gas industry (O&G) has been at the lowest end of the capital cycle for the past three years.

“Petronas plans to allocate an average of RM20 billion in capex in upstream activities over the next five years. It was much lower over the past couple of years at RM12 billion a year on average.”

Ng prefers O&G-related firms such as Hibiscus Petroleum Bhd and Dagang NeXchange Bhd, which have been riding the oil price rally.

Rather than a strong US dollar, Yoong is more concerned about rampant inflation.

“The US dollar strength is not sustainable. There is still headroom for the US dollar/ringgit exchange rate to move to 4.70 in the next 12 months, as Bank Negara Malaysia will be less aggressive than the Fed in raising interest rates,” he says.

“The US dollar strength is currently driven by the Fed chairman taking a hawkish stance in increasing interest rates beyond neutral. It is pricing in many rate hikes. Many reserve banks globally are still hesitant about increasing interest rates lest economic activity is adversely affected.”

Pankaj reckons that the US dollar is almost reaching its peak, as he believes the market has overestimated the pace of interest rate increases.

“We could see a withdrawal of liquidity from the market through tightening. That would mean the economic momentum will start to slow down considerably. Then the inflation reading will also ease and the likelihood of the Fed raising interest rates will not be there.

“While the Fed is still behind the curve, I don’t believe the rate hike will be that aggressive as predicted by the market. Slower economic momentum will result in the Fed turning dovish and weakening the dollar,” Pankaj explains.

Ng estimates that the ringgit will bottom at the 4.40-to-4.50 level in view of the country’s robust forex reserves and trade surplus.

He believes that when currency prospects improve, regional currencies will attract foreign funds again.

“We cannot say the valuation of regional markets is very attractive because we are still living with Covid, coupled with lingering issues such as the US-China trade war, Russia-Ukraine conflicts and rising raw material prices. There are many external factors, but Asean is still a good place to park your investment.”

Domestically, Ng says, the impact of the one-off prosperity tax should not cloud longer-term prospects.

For those with the stomach for risk, Ng suggests a small exposure to cryptocurrencies. “If you are not familiar, I would strongly advise against investing in alternative investments like cryptocurrencies. It should not be the core investment.”

Pankaj says investors must be mindful of where they put their money before making any investment decision in the cryptocurrency space, where prices have taken a severe beating recently, with Bitcoin slumping to a 17-month low of US$25,400 (RM111,770), after the collapse of stablecoin TerraUSD.

“There is no fundamental value to some of the cryptocurrencies in the first place. They will also never be a replacement of legal tender,” Pankaj adds.

Overall, investment experts believe equities are still a better investment choice than more esoteric asset classes.

“Well-managed companies with good pricing power and strong cash flow can overcome the scourge of inflation,” says Yoong.

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