POLITICAL upheaval is driving a split in South-east Asia’s financial landscape, as investors bet that the worst may finally be over in Thailand but only just getting started in Indonesia.
Foreign investors have pulled US$653 million from Indonesia’s stock market this month, the worst period of selling since April as violent protests and the abrupt replacement of the finance minister rock the country. Thailand’s long beleaguered stock market looks set to reap the benefit: Aberdeen Investments, Gama Asset Management and Valverde Investment Partners now say the market stands out as the hot pick among the two, and a prolonged exodus of foreign funds has slowed to a trickle.
The moves underscore the shifting environment for emerging market funds investing in South-east Asia, long a region defined as much by political turmoil as economic opportunity. While Thailand has for years been roiled by changing governments and civil unrest, Indonesia has been a relative source of stability. That is now starting to change, forcing investors to reconsider their approach to both countries.
“Thailand is seen as coming from the bottom towards stabilising as the new Cabinet gets formed, but Indonesia seems to be heading the opposite direction – from bad to worse,” said Xin-Yao Ng, a fund manager at Aberdeen Investments, adding that he is now increasing his exposure to Thailand while remaining underweight on Indonesian assets.
Driving much of the optimism in Thailand is a political transition after a new prime minister took office. Anutin Charnvirakul, a conservative who was elected after his predecessor was ousted for ethical violations, is considering reviving a Covid-era co-payment subsidy programme to stimulate consumption.
The baht has gained about 2 per cent against the US dollar this month, making it the strongest performer so far among Asian currencies, Bloomberg-compiled data show.
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The stock benchmark SET Index has climbed more than 4 per cent this month to a seven-month high, while foreign investors’ pace of selling equities has slowed. They’ve unloaded US$21 million of Thai shares so far in September after they dumped US$670 million in August, according to Bloomberg-compiled data.
Improved sentiment could push the index to 1,340 by year-end, according to Prakit Siriwattanakage, managing director at Merchant Partners Asset Management. Inflows into the stock market will also support the baht, he said.
Thailand’s relatively strong fiscal position gives it room to stimulate the economy and target areas in need of support, said John Foo, founder of Valverde Investment Partners, noting Thai stocks’ favourable valuations after past selloffs.
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“This is an opportunity to overweight Thailand amid an improving political and economic climate,” he said.
Investors rattled
Indonesia paints a very different picture. President Prabowo Subianto’s abrupt replacement of Dr Sri Mulyani Indrawati with Dr Purbaya Yudhi Sadewa has rattled markets. Dr Sri Mulyani was well-respected among global investors, while her successor – despite pledges to be prudent – is little known.
“Indonesia is undergoing a period of heightened economic uncertainty,” said Jason DeVito lead portfolio manager for emerging market debt at Federated Hermes. The political changes “will introduce a degree unpredictability for investors, particularly given Sri’s longstanding role in shaping the country’s reputation for fiscal discipline”.
Indonesia plans to inject about 200 trillion rupiah (S$16 billion) into the banking system to help boost lending and growth, drawing from 400 trillion rupiah in cash reserves built up through past underspending. But concerns over fiscal direction had been brewing for months, as Prabowo pushed populist measures such as a free school-lunch programme.
Indonesia’s economy broadly remains weak, and the one-off stimulus only offers short-term relief, said Valverde’s Foo.
Such concerns over Indonesia’s fiscal health are showing up in the bond market, where the yield curve – the gap between 2- and 10-year bonds – hovers close to the steepest in more than two years. The rupiah’s recent decline extended its loss against the US dollar this year to more than 1.5 per cent, making it the worst-performing currency in Asia after the Indian rupee.
Dr Purbaya is doing his best to win investors’ approval. Just days after pledging the 200 trillion rupiah injection to state banks, the finance minister made clear the government would add more if it was needed. The central bank has also been called in to help, with a so-called burden sharing agreement designed to support growth. But so far, foreign fund managers remain unconvinced.
“The Indonesian government still has a lot to prove,” said Aberdeen’s Ng. “I’ve actually been funding Thailand from more expensive markets by taking profit from China, Korea and tech in Taiwan.”
