Since the end of June, Southeast Asian markets, including the Philippines, have outperformed the United States. This was driven by growing expectations that the US Federal Reserve would adjust its policy, which caused the dollar to weaken, strengthening Southeast Asian currencies. For instance, the peso appreciated by 4.5% since late June.
Foreign investors are increasingly interested in Southeast Asian stocks, motivated by the region’s promising economic growth outlook. The GDP growth of most countries in Southeast Asia is expected to surpass that of the United States both this year and next year. Specifically, the Philippines is projected to achieve one of the fastest growth rates, with estimates of 5.8% for 2024 and 6% for 2025. Lower debt levels and budget deficits also make Southeast Asian nations less risky compared to the United States. The debt-to-GDP ratio in the US reached 123% in 2023, while Southeast Asian nations had ratios ranging from 37% to 62%.
Despite a budget deficit of 6% in 2023, the Philippines’ economic growth has been rapid, putting it in a better position to address its debts compared to the United States. Projections indicate that the strong growth in the Philippines will continue, bolstering its fiscal position.
Valuations of Southeast Asian stocks are notably lower than those of the United States. Markets in the region are trading significantly below their 10-year historical average price-to-earnings (P/E) ratios. The Philippine Stock Exchange index, despite its recent performance, has a P/E ratio of 11.7, well below its historical average of 15.7. In contrast, the S&P 500 index is trading at 21.6 times earnings, which is above its 10-year average of 18.2.
In addition to economic factors, favourable demographics further support the outlook for the Philippines. The median age of Filipinos is low at 25.7 years, and the population is growing at a rate of 0.8% annually, which is better compared to most other countries in the region. Furthermore, the Philippines is less vulnerable to a potential global economic slowdown since it is a net importer rather than export-dependent, with household consumption making up 73% of GDP.
However, risks remain for investors, particularly due to potential contagion if the US economy enters a recession or bear market. Historically, such scenarios have negatively impacted the Philippine economy. Nevertheless, the favourable economic fundamentals and attractive valuations of local stocks might mitigate these impacts, leading to a quicker recovery.
Southeast Asian markets, led by the Philippines, have seen notable outperformance compared to the United States due to expectations of a Federal Reserve shift, regional growth prospects, and favourable valuations. While risks from external factors like a US recession remain, the underlying strengths and cheap valuations suggest potential resilience for Southeast Asian economies, especially the Philippines.
Fidelity Asian Values Plc (LON:FAS) provides shareholders with a differentiated equity exposure to Asian Markets. Asia is the world’s fastest-growing economic region and the trust looks to capitalise on this by finding good businesses, run by good people and buying them at a good price.
