BANGKOK - Year-to-date stock index gains in Thailand and the Philippines that are double those on broad Asian and world indexes suggest the easy money may already have been made in Southeast Asia.
After benefiting from a strong domestic consumption play, Southeast Asian stocks could now underperform as investors hunting risk shift to markets that are exposed to global growth, encouraged by central banks pumping in liquidity.
Some investors are wary of frothy premiums building up in smaller, illiquid Southeast Asian markets. Others see more promise in chasing high returns in cheaper markets.
Thailand's benchmark SET index is up 26 percent so far this year, while the Philippines has gained more than 23 percent. The MSCI index of Asia Pacific shares outside Japan and the world index have risen 10-12 percent.
The Philippine and Malaysian stock markets trade at price multiples of 17 and 16 respectively, the highest in Asia, while the lowest, Chinese and South Korean markets, trade below 10 times.
The gains coincide with an economic resurgence in Southeast Asia as the region of 600 million people defies a stubborn downturn in the United States, Europe and even Asian powerhouse China, underpinned by an ebullient new middle class and a wave of credit on the back of low interest rates.
"The risk-reward is actually more attractive for a tactical overweight in the more cyclical markets," said Soek Ching Kum, head of Southeast Asia equity research at Credit Suisse Private Banking in Singapore.
"If you're going to see more evidence of fiscal spending on infrastructural development in Thailand, I think that will be a catalyst also for the funds to be excited by the market," said Kum. The private bank has a 'neutral' rating on Thailand.
Southeast Asian markets have performed well in the past three years, since the global financial crisis. Jakarta's Composite Index is up 3.2 times, just ahead of Thailand and the Philippines. The broad MSCI Asia exJapan index has risen 1.8 times.
"This is more a story about the improvement in external and global demand. Early on, funds were moving out from global growth and high beta to defensive. Now, it's more like buying back of the high beta once again," said Hong Kong-based Mun Hon Tham, regional strategist at Maybank Kim Eng Securities.
Indonesia, which saw $6.1 billion in foreign inflows in the three years to 2011, has gained another $1.8 billion so far this year. Thailand took in $2.2 billion this year, after an outflow of $167 million last year in reaction to severe flooding that hit the capital Bangkok and crippled industrial supply routes.
Foreign inflows into Philippine equities have surged to $2.3 billion this year from $2 billion in the two years to 2011.
Companies in Southeast Asia are benefiting from an increase in foreign investment and public spending by governments. That has lifted domestic consumption by an expanding middle class.
A screening of some 2,300 companies in Asia with a market value of at least $1 billion shows that six of the biggest gainers by price performance so far this year are from Southeast Asia. These include Thai food and beverage firm Oishi Group Pcl and Philippine drinks firm Tanduay Holdings Inc
"It will probably be clearer to think about this in terms of sector rather than country per se," said Sriyan Pietersz, head of ASEAN and frontier markets research at JP Morgan, who predicts outperformance by globally oriented, cyclical sectors such as petrochemicals, energy and technology.
Southeast Asian investors are already gravitating towards better performing funds.
CIMB strategist Chang Chiou Yi advises investors to look at stocks with a market value of more than $500 million and sees value in Singapore's commodities sector, Indonesian banks, Thai petrochemicals and Malaysia's financials.
"We think the fog has lifted somewhat on the euro zone, but we're not out of the woods. There's still a lack of conviction in the recovery in global demand. With that in mind, we prefer to stick with our value-hunting strategy," she said.