(Aug 31): Global investors are boosting exposure to Indonesia and Malaysia on bets the two markets will benefit more than their developing-nation peers as the US Federal Reserve (Fed) looks set to embark on monetary easing.

Sound fiscal policies and focus on new technology sectors such as electric vehicles (EVs) and data centres are among factors attracting funds to the two Southeast Asian markets, which have long been overshadowed by bigger rivals India and China. Conviction is growing that their relatively light foreign positioning and reasonable valuations will lure more flows from overseas.

“Indonesia and Malaysia will benefit more from their responsible fiscal behaviour, which is the thing you need, because the Fed pivot in theory is a boon to the entire emerging-market universe,” said John Lin, a portfolio manager at AllianceBernstein in Singapore, whose emerging-market fund has added to both markets this year at the expense of India.

For August, Indonesia, Malaysia and the Philippines have been the only countries in Asia to see overseas inflows into stocks on a net basis, according to the latest data compiled by Bloomberg.

Global funds bought US$1.80 billion (RM7.77 billion) of Indonesian shares, the most since April 2022, adding to purchases in July. That’s helped the benchmark Jakarta Stock Exchange Composite Index hit successive record highs in recent days. Bond flows into Indonesia were set to be the highest since January 2023, as per data through Aug 28.

Expectations are growing that as concerns about the rupiah’s weakness abate, Indonesia’s central bank will have the scope to ease monetary policy after a surprise interest-rate hike in April. The incoming government’s pledge to maintain fiscal discipline and the country’s role in the global EV and battery supply chains are also factors keeping traders interested.

At US$491 million, foreign buying of Malaysian stocks this month through Aug 29 is set to be the highest since March 2022. The nation has seen two quarters of blowout economic growth, aided by investments in the tech and artificial intelligence (AI)-driven data centres. The country’s position as a chip-testing hub has helped draw billions of dollars in infrastructure spending from the likes of Microsoft Corp, Nvidia Corp and Alphabet Inc.

“Malaysia is looking more interesting than it has in a long time,” said Vivian Lin Thurston, a fund manager at William Blair Investment Management in Chicago. “A couple of our emerging-market strategies have started to invest in Malaysia in recent times in light of the country’s economic improvement and growth of data centres. We hope to broaden the exposure to other strategies.”

To be sure, there are risks too.

Investors continue to scrutinise the leadership transition in Indonesia, as they seek policy continuity under the incoming administration of President-elect Prabowo Subianto. For Malaysia, any rapid unwinding of the AI trade — like the one seen in early August — could spark volatility. The US election also remains a broad overhang for Asian assets, with any escalation of geopolitical and trade tensions likely to weigh on sentiment.

For now though, optimism is running high, even among sell-side strategists. Nomura Holdings Inc this week upgraded equities in both Indonesia and Malaysia citing solid macro fundamentals, while HSBC Holdings plc noted that Indonesian stocks had started commanding a bigger heft in the portfolios of Asian funds.

The ringgit and rupiah are among August’s top three gainers against the dollar in a basket of more than 20 developing-nation currencies. Fed chair Jerome Powell said this month that the time had come to cut its key policy rate, affirming expectations that US officials will begin lowering borrowing costs from September.

Exchange-rate watchers see likely further weakness in the greenback giving emerging-market currencies more wind in their sails. With foreign currency holdings at banks in Malaysia and Indonesia near a record according to data compiled by Bloomberg, more support is seen coming when exporters convert their dollars into local currencies.

Southeast Asia is “undervalued, under-invested and under-researched, which means a lot of alpha”, said John Foo, the founder of Valverde Investment Partners Pte Ltd. It’s “at a new beginning as global allocators position back in the region”, he added.

Uploaded by Tham Yek Lee