Southeast Asian stock markets have solidified their position as the preferred investment targets for fund managers amidst the shift in Federal Reserve policy. Of the top 5 performing Asian stock indices this month, 4 are from this region, with Thailand performing the best.

This buying frenzy has led to continuous inflows of foreign funds into the region for the fifth consecutive week, and the Morgan Stanley Capital International (MSCI) ASEAN Index is currently nearing its highest level since April 2022. Factors driving investor enthusiasm for markets like Indonesia and Malaysia include relatively low foreign investor positioning, supportive local policies, and attractive valuations. These advantages have created opportunities for the Asian region to capitalize on the transfer of global investors from larger economies.

John Foo, founder of Valverde Investment Partners Pte, said, "Southeast Asia has been overlooked for so long. Investors are beginning to realize that there are many opportunities, from Indonesia's csi commodity equity index companies to Singapore's stable real estate investment trust market, as well as technology companies in Malaysia, export companies in Vietnam, and numerous recovery companies in Thailand."

One key factor driving optimism in the Southeast Asian market is that foreign funds have relatively low positions, giving them room to expand their allocations. Valuations also appear attractive, with the MSCI ASEAN Index trading at a 12-month forward price-to-earnings ratio of 13.6 times, compared to a five-year average of 14.7 times. Kenneth Tang, portfolio manager of Nikko AM Shenton Thrift Fund, said that recent positive policies such as Indonesia's fiscal stimulus measures and Thailand and Malaysia's initiatives to encourage stock ownership have acted as catalysts.

He added that these countries have also benefited significantly from their representation in interest rate-sensitive and high-yield industries, from banks to real estate developers. These factors have boosted the performance of the Southeast Asian market, with the ASEAN Index outperforming the MSCI Asia Pacific Index by around 14 percentage points since early July.

Brokerage noticed this. Goldman Sachs upgraded the rating of Thai stocks from sell to market weight (neutral) this month, because the bank's strategist Timothy Moe wrote in a report that he expects that Thailand's newly established state-owned Vayupak fund will provide "sentiment and liquidity support, attracting foreign capital back to the market".

Last month, Nomura Holdings upgraded the ratings of Malaysian and Indonesian stocks. Chun Hong Lee, portfolio manager of Principal Asset Management Bhd, said: "If the interest rate cuts continue without an economic recession, this round of rebound may continue until the end of 2025."

Editor/Rocky