2025 Outlook and Highlight on Southeast Asia (ASEAN)
2025 will be the year the world rediscovers the investment value of emerging market (EM) stocks, due to volatilities in US bonds and equities. Recent strength of US assets has been driven by a one-sided view of tariffs. The flipside, i.e. higher inflation and high interest rates, will weigh down US stocks like gravity, via earnings disappointments and consumer weakness.
With economic and political issues everywhere, investors will start to look for value and relative strength this year amid large volatilities. They will find EM attractive due to:
- Fundamentals are solid in most large EMs. For example, most countries in Southeast Asia are growing GDP at around 5%. Also, Southeast Asian countries have learned their lessons from past crisis. They now have a solid financial sector and are in good shape fiscally. On the other hand, many developed market countries have their own debt issues now. Weakening DMs like Japan and most of Europe will be outcompeted by a number of up-and-coming EM countries such as Indonesia.
- Currency declines should be self-correcting rather than self-reinforcing. As most large EM countries have reduced their foreign currency debt significantly, currency weakness no longer automatically trigger debt crisis. Instead, currency declines would make their assets more attractive. Domestic and foreign investors step in, leading to eventual rebounds. In other words, the better EMs offer buy-on-dip value opportunities.
- Geopolitical situation: With one or two exceptions, ASEAN countries are mostly capable of keeping peace in their country, which is attractive to global capital.
- Good businesses are priced quite low, after a decade of low returns. Most people are ready to give up on EM as a whole, but experienced investors understand that is a sign of late cycle – it is darkest before the dawn.
At this stage, the US stock market will still have pockets and periods of strength in 2025, but not in all of the market for all of the year. With sticky inflation and such a high level of interest rates, it is too hard to preserve the 16-year-old bull market for long. Big volatilities will be unavoidable, which will open people’s eyes to the value of the rest of the world.
I’m not making a broad case for all EMs, but just a small set of relatively large, well-managed EM countries. Of the global emerging markets, I’d highlight here the merits of Southeast Asia (ASEAN).
- Singapore: Many global companies have their regional headquarters in the city-state known for its stability. SGD has been stable vs. the USD. Many Singaporean companies have growing businesses in ASEAN, making it a safe DM starting point to participate in the growth of the region. United Overseas Bank is a good example.
- Malaysia: The Malaysian Ringgit has been one of the best performing currencies in the world, +3% vs the dollar in 2024, due to a strong export sector (electronics and oil & gas), fiscal reform and strong FDI. The surge of FDI is coming from both the US and China. Recently announced FDI is concentrated in data centers, cloud computing and AI, from companies like Google (USD 2 billion), Microsoft (USD 2.2 billion) and ByteDance (USD 2.1 billion). Some businesses such as tech companies and utilities will benefit directly, and consumers indirectly.
- Indonesia: Indonesia has resumed its 5% growth rate, which has been quite steady for decades now with the exception of the Covid hit. Its industrial policies such as insisting on foreign businesses (recent example is Apple) to do manufacturing in the country are showing positive impact. Central bank intervention is shoring up the currency near-term, while FDI provides tail wind long term. It is a good opportunity to pick up strong businesses e.g. Bank Central Asia.
- Thailand: After years of anemic GDP growth, everything is cheap in Thailand. Its attractiveness as a destination for leisure tourism, medical tourism and manufacturing is enhanced. There are now signs of a nascent recovery in the Thai economy. Retailers or housing could be ways to capture that.
- Vietnam: Last but not least, Vietnam is on a solid footing again after weathering a real estate downturn. 2025 GDP growth is expected to be around 6.7%. In addition to all sorts of mundane products to export, the country’s tech sector has got a boost when Nvidia in early December signed a MOU to establish two cutting-edge AI centers. In listed companies, Vietnam has solid banks and competitive businesses such as FPT Corp, a fast-growing IT services company.
- One common theme of ASEAN is the region is a primary destination of supply chain reshuffling, making it a net beneficiary of impending tariffs. Tariffs are accelerating the ongoing trend of supply chain moves to Southeast Asia, which is one of the few certainties in this changing world.
Again, I’m not trying to making a broad EM call, but just highlighting a small number of well-managed EM countries and investment opportunities. I have my money invested in high quality businesses there.
Here I’ll give my quick view of other EM regions and countries:
- Latam: under pressure short-term but there is no crisis, and most assets will have strong rebounds
- South Africa: many good companies have done well in 2024 especially after the election. For example, Capitec Bank was +53% in 2024 in USD terms. Investors should look for pullbacks as opportunity to get in good names like that.
- Middle East: not as cheap as Latam but many interesting under-discovered stories in equities
- India: large-caps are not as expensive
- East Asia: the big economies in East Asia are large markets. One should be a stock picker in these markets rather than relying on broad market views.
- As for many smaller markets that should be called frontier markets, their currency and debt dynamics could be precarious. Ironically, many global investors these days are attracted by the big swings and tend to travel straight to the more volatile markets like Argentina or Kazakhstan. “Don’t fly too close to the sun” comes to mind. For most investors, I believe it is much better to stay with the more “boring” EMs like Malaysia, Indonesia, Thailand and Vietnam.
Access to the ASEAN markets isn’t convenient for global investors. Singapore has some listings of companies in the region, for example CPALL of Thailand, but in general it is hard to buy stocks in the ASEAN region from one’s brokerage account unless you live there. Investors need to look for dedicated Southeast Asia funds or broader EM-focused funds.
To be sure, 2025 will be another year of walking gingerly and watching out for turmoil. But in a world of various issues and volatilities, a number of EMs are solid enough to withstand downturns and actually well positioned to benefit from the major themes of this era such as supply chain reshuffling. It is time to invest in the safer, if less obvious, part of EM like Southeast Asia.
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The Case for a Brazil Comeback
The Case for a Brazil Comeback
At first glance, the sell-off of Brazilian assets since last week looks like the classical EM meltdown - political mishap (a disappointing fiscal plan), currency weakness (BRL down 4%), and stock swoon (EWZ -7%). Oh no, Brazil shoots itself in the foot again!
But on a closer look, things are not as dire. Brazil’s sovereign CDS moved up a little but stayed below the level when Lula got reelected. As Brazilian indebtedness is now mostly in its own currency, there isn’t the feedback loop of weak currency begets more weakness in bonds and other assets. BRL weakened for two days but then flattened out at around 6.05. Ibovespa has been up since Friday in local and USD terms.
Yes the fiscal package was a missed opportunity but it is not a rampage of leftist spending either. Instead of listening to the locals, watch what they do. People are not selling stocks and moving money out of Brazil, like they used to do in past crisis. They are investing in local bonds instead. Government bonds give you double-digit returns. Corporate yields even higher, and this seems to be a good time to take a little credit risk as the economy has remained strong.
Yes inflation is a problem, but the bond attractiveness is solidifying the carry trade for outsider and insiders. The decline of asset value is becoming self-rebalancing.
Yes there will be pain from political noise, but we can trust that Brazil will come back to the right path after detours, as its institutions are strong. In fact, on Friday, congressional leaders from both chambers cautioned against the government’s income tax exemption proposal. After the congressional leaders assured the market of their commitment to fiscal prudence, BRL stabilized.
Eventually, Bolsonaro’s potential comeback can work as a catalyst for the market to start pricing in potential positive changes. The presidential election is 22 months away, but the hope is there and the drumbeat will only get louder as we move through 2025.
The longer term story for Brazil is clear. In addition to commodities, there are many good businesses, entrenched in a country that is away from global geopolitical flashpoints and structurally resistant to wanton political interference. It’s time for thoughtful investors to pick up shares of great companies trading at very attractive valuation levels.
For example, Localiza&Co (RENT3-BR or LZRFY) is the dominant car rental and fleet management company. It is trading at 2.4x tangible BV, on par with the historical low it reached in early 2016. But the business is a much better one now, as the company has further consolidated the market with about 40% market share in rental cars. B3 SA, which owns the country’s stock exchange, is trading at 10x PE, on par with its own all-time-lows reached in 2H15. Again, a great business sitting far away from geopolitical flashpoints, with very attractive returns over the cycle. It’s a good time to be open-minded and play contrarian here!
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Trump II and Mexico – follow up – the case for North America
Poor Mexico! President Trump’s opening salvo of tariffs is going to the North American partners, Mexico and Canada. There is no need to panic. If the real goal is non-trade issues such as border control, Mexico will comply with US requests and save its export sector and the near-shoring story.
If the goal is about trade, it will not be to destroy Mexico’s economy. Instead, it mainly comes down to tighter rules on the country of origin, to soon stem the trade diversions flowing through Mexico around the US tariff barrier.
Country of origin is already addressed in USMCA, with time tables to raise the percentage of contents of North America regional production. Tightening rules and moving up the deadline for value-added within NA will actually benefit Mexico. Last week, I heard from several companies they would accelerate investments in Mexico if local content requirements get moved up in timeline.
Overall, tightening up rules and closing loopholes in the Nafta zone first is the right sequencing in making upcoming US tariffs more credible to the rest of the world. And again, if Trump’s main mandate is to diminish economic ties with China, Mexico is the indispensable partner of the US rather than a helpless victim.
The immediate result of the US election has been US Dollar strength, and MXN has fallen substantially. But with the Fed still on a rate-cut path, the knee-jerk market reactions will wear off. In the longer run, too high a value of USD will be self-defeating due to the direct and indirect effects: 1) high USD will work to depress the competitiveness of US goods and services; 2) tariffs reduce trades, which reduce the supply of $ trade surpluses that have been recycled into the US as supporting force for the dollar for decades.
So over time, the supply and demand of USD, with some self-balancing mechanism and some policy-driven volatilities, will decide the value. I believe more likely than not USD will be on the weak side in the medium term to facilitate achieving the paramount goal of boosting US manufacturing jobs.
And EM assets will be a counter-balancing, uncorrelated positive source of investment returns.
As long as they survive the short run. But the short run simply isn’t a problem this time around. The bond market has not been shaken by the currency swings of the recent days and weeks. Since even the frontier markets are not blowing up, there really isn’t a need to overreact to current issues in large EMs like Mexico.
It’s not difficult to find names in Mexico worth investing in. High-quality large companies Walmex and Banorte are both cheap. The airport companies (ADR: PAC, OMAB and ASR) all have been listed for almost two decades, with a good track record of profitable growth. I also like REITs such as Fibra Macquarie (FIBRAMQ MM) as direct beneficiaries of the industrial economy. Fibra Macquarie has a ADR: DBMBF, although its liquidity isn’t high.
previous posts
Trump II and Mexico
Posted Nov. 2024
Mexico is considered one of the most obvious losers as Trump wins a second term. I would make a contrarian call here to invest in Mexico.
The main issue is tariff. If a tariff of 10% is imposed on all Mexican exports to the US, wouldn’t Mexico get hurt? Yes. But let’s not forget that the main target of tariffs is China. If tariffs on Chinese exports go to 60%, Mexico will actually benefit. It’s the differential that matters. Mexico’s competition is China. As long as tariffs on Chinese exports to US is meaningfully higher than those on Mexican, Mexico will gain significant market share.
The evidence is already there. In the past a few years, as China’s export to the US has been falling, Mexico’s has been rising. In 2023, Mexico overtook China to become the biggest source of imported goods for the US. The tariff differential was already large enough to motivate the switching, including some trade diversion from China. Mexico may be a victim to tariffs in the short run, but it is a beneficiary in the long run.
At the end of the day, the only low-cost producer in the USMCA (NAFTA 2.0) zone is Mexico. Even with significant pressure coming from a top negotiator sitting in the White House, Mexico is the partner that the US needs in an inflationary environment.
The market is having a big knee-jerk reaction to sell off Mexican stocks today. I would use this as an opportunity to buy high-quality businesses there. There are many. Leading companies Walmex and Banorte are both cheap. My favorite is the airport stocks. The three airports (ADR: PAC, OMAB and ASR) all have been listed for almost two decades, with a good track record of profitable growth. I would start accumulating shares here. If the Mexican peso stays weak for a while, at least consider making more trips flying down to Mexico!
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Brazil – debt upgrade; stocks to buy
This article in Barron’s today on Brazil: https://lnkd.in/eZWvn6Uy mentioned the sovereign debt upgrade (to “Ba1”) issued by Moody’s on October 1. Local sentiment on stocks is “pretty horrible”, but I believe that is more a reflection of the attractive bond yields than the outlook of businesses. It is actually a good opportunity for global investors to buy strong franchises whose shares are under pressure by the high interest rates.
One name to pick up here is #Localiza, the dominant car rental and fleet management company in the country, with a growing business in Mexico. Recent earnings weakness is driven primarily by weak used car prices. Accounting (timing difference!) dictates that depreciation expenses will remain high for a few more quarters, producing poor-to-ugly near-term earnings, but Localiza’s true earnings power isn’t really impaired. Buy some today, buy more after earnings releases. RENT3-BR (US ADR is LZRFY).
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China – window of opportunity
Posted Oct. 2024
Chinese shares’ recent rebound is a trading opportunity. There still is some upside from here as policies are likely to be strong enough. Meanwhile, the Fed isn’t ready to make a 180 turn back to hiking. Therefore, it is a trading opportunity.
Previous posts
Brazil – let’s be forward looking
Posted Oct. 2024
Brazil has been one of the worst performing stock markets in EM since the Fed turned to easing, due partly to weakness in BRL. It is understandable as Brazil has questionable fiscal discipline. But we live in a new era of fiscal problems everywhere, and it is time to take a new playbook. Brazilian bonds offer attractive carry to global investors, and FDI and Brazil’s trade balance provide fundamental support to the currency. It is time to pick up some of the stocks pressured by the still-high interest rate, such as Assai (ADR ticker ASAI – I don’t think this large cash-and-carry grocer is spiraling towards bust). For people who can buy Brazilian shares, an easier, growthier story is Grupo Mateus (GMAT3-BR).
previous posts
Connector countries – the EM (ex-China) story
A presentation given by IMF’s deputy MD in May this year talked about connector countries, which are countries (like Mexico and Vietnam) where trades and investments are being re-routed to. In the era of Cold War II, I believe the connector countries, i.e. EM ex-China, are the main beneficiaries. They are solid, resourceful large emerging economies. There are great companies there, if you can find the right captains of capital that drive growth. My coming years will be dedicated to investing in these EM stock markets and bringing results to investors.