Southeast Asia Gears Up For Growth Amid Trade Uncertainty

As global investors brace for the uncertainty surrounding Donald Trump’s trade policies, Southeast Asia is emerging as a key investment destination. The U.S. president-elect’s proposed tariffs on China are expected to accelerate shifts in global supply chains and foreign direct investment, potentially benefiting the region, analysts suggest.

While the regional MSCI Asean Index has slightly underperformed the broader Asian market this year, analysts are optimistic about the prospects for 2021. With trade exposure less of a concern for some Southeast Asian economies, these markets are expected to show resilience, bolstered by robust domestic consumption and strategic policy flexibility.

According to Mohit Mirpuri, an analyst at SGMC Capital, markets such as Indonesia and the Philippines are well-positioned for stability, driven by strong consumer demand and flexible policy frameworks. These factors make the region an attractive option for investors seeking stable returns.

The MSCI Asean Index has seen a 7.7% increase this year, with JPMorgan Chase & Co. projecting a potential 14% rise by 2025, should favorable market conditions materialize. However, most Southeast Asian nations have experienced foreign capital outflows this year, as global funds pull back from markets such as Malaysia, Thailand, and Vietnam. This trend comes amid a series of interest rate cuts by the Federal Reserve, though its cautious approach moving forward could impact future investment flows.

Despite these challenges, analysts like Vicki Chi, portfolio manager for Asian equities at Robeco Hong Kong, remain optimistic about the region’s outlook. The region is expected to benefit from the spillover effects of U.S.-China tensions, which will encourage further investment into key sectors such as data centers, green energy, and infrastructure. Chi has highlighted Asean banks and IT-related shares as strong investment opportunities, given their relative independence from global interest rate fluctuations.

While trade-dependent nations may face challenges from a potential trade war, some countries are better positioned to weather the storm. Ongoing policy reforms in Malaysia and strong government spending in Vietnam are expected to support economic growth, while a recovery in tourism and domestic demand in Thailand may drive its recovery. In Singapore, high-yielding assets continue to attract investor interest.

Kenglin Tan, portfolio manager at Manulife Investment Management HK Ltd, noted that Chinese companies are increasingly investing in Southeast Asia, not only to diversify manufacturing but also to tap into the growing domestic demand within the region.

Valuations in Southeast Asia are also appealing to investors. The MSCI Asean Index is trading at 13.5 times forward earnings, below its five-year average of 14.6 times, offering further potential for growth.

Despite ongoing headwinds, including a slowdown in global demand and the impact of a stronger dollar on emerging markets, Southeast Asia’s growth trajectory remains positive. Maybank Research predicts that Asean’s GDP will grow by 4.7% in 2021, further cementing the region’s potential.

As a result, Nirgunan Tiruchelvam, head of consumer and internet research at Aletheia Capital in Singapore, advises investors to consider increasing their allocation to Southeast Asia. With its strong domestic growth prospects and strategic positioning amid global trade shifts, the region is poised for continued growth in the coming year.