investment viewpoints

Powerhouses of growth in South-East Asia

Powerhouses of growth in South-East Asia
June Chua - Portfolio Manager, Asian equities

June Chua

Portfolio Manager, Asian equities
Faye Gao - Senior Analyst and Junior Portfolio Manager

Faye Gao

Senior Analyst and Junior Portfolio Manager
Ashley Chung - Senior Analyst and Junior Portfolio Manager

Ashley Chung

Senior Analyst and Junior Portfolio Manager

Need to know:

  • Among our overweights this year are Indonesia and the Philippines – two domestic-driven markets where a slowdown in global growth would have less impact
  • Significant developments in Indonesia include its emergence as an EV battery materials powerhouse and the impending move to a new capital city 
  • Key features of the Philippines include cheap valuations and a high economic growth profile relative to Asian peers 

As we look into 2024, we like countries and sectors with dominance in either local macro strength or global exports. We already discussed India in our previous insight. Our two other country overweights are Indonesia and the Philippines1. We outline the reasons why in the latest instalment of our outlook series on Asia equities.  

Indonesia – Emerging domestic powerhouse 

We are optimistic that Indonesia’s economic growth will remain steady, at around 5% in 2024, outpacing most developed market peers. Earlier in the year, all eyes were on the presidential elections. The outcome positively surprised the market with a convincing win by the Prabowo-Gibran ticket. The Prabowo-Gibran ticket had been leading the polls into the election, riding on the tailwind support from incumbent President Jokowi. 

Given the outcome, we are more confident that policy continuity will encourage corporates to refocus on investment plans. We expect developments like moving up the manufacturing value chain, Indonesia becoming an EV battery materials powerhouse and the move to the new capital, Nusantara, to continue. We expect some other policies that were promised during the election campaign, such as affordable housing and rural development, to take shape and further drive the investment case for Indonesia. 

Historically, the Indonesian equity market performed positively in election years as the new president and cabinet lifted confidence among market participants. We continue to await details of the cabinet line-up and further policy announcements. 

FIG 1. Indonesia equity market performance during election years

Source: Bloomberg.

A new capital city 

Moving back to a little background on the relocation of the capital: the idea had been around since independence, with President Soekarno (1945-1967) planning to move it to Palangkaraya in Kalimantan. President Yudhoyono (2004-2014) also floated the idea. The move was finally passed under President Jokowi’s administration. Key reasons include Jakarta’s over-population and traffic congestion. Jakarta is one of the world's most densely populated cities, home to more than 10 million people, and the population is expected to exceed 35 million by 2030. It is also one of the most congested cities. The National Development Planning agency (Bappenas) has estimated that traffic congestion in Jakarta caused economic losses of about USD 4.7 billion in 2017, the most recent year for which data are available. 

Nusantara is expected to be completed in 2045 at a cost of USD 35 bn, with the state funding 20% and the rest funded from public-private partnerships and private investment. The capital city when completed will be the first city in Indonesia to adopt 100% renewable energy.

FIG 2. Map of new capital

Source: Nusantara to Be Among World's Most Sustainable Cities: Authority Head. 31 March 2023.

We believe Indonesia will continue to deliver with the election now behind us. Indonesia’s fundamentals are also supported by strong corporate earnings, which are expected to grow 13% in 2024, just behind India’s. Initiatives to attract FDI have been a resounding success, with a record USD 44 bn in H1 2023 alone from investments in the EV battery chain and manufacturing. We like banks and consumer plays in Indonesia, which we believe are a good proxy for the overall market. 

Philippines – small market with strong fundamentals 

The impression many investors have of the Philippines is that it is a small, illiquid equity market. This is true of course – it has a market cap of only USD 274 bn and accounts for less than 1% of the MSCI Asia ex Japan. However, we believe 2024 is setting up quite nicely for the Philippines, with consensus estimates for 5.8% GDP growth. The economy is largely domestic-driven and would be shielded from the global slowdown. Inflation has also been easing, and consensus expects inflation to slow to 3% in 2024, well within the range of the central bank. This setup then makes it very conducive for BSP, the central bank, to embark on rate cuts, similar to the expected path of the Fed. The peso is expected to be stable with improving external balances. 

Source: UBS, Refinitiv, CEIC, BSP.

Historically, in times of rate cuts the Philippines would see renewed optimism for private and corporate spending. We would expect the same this time, particularly given the cheap valuations and high economic growth profile vs Asian peers in 2024. 

Source: Refinitiv, UBS estimates.

In the Philippines we like banks and property, which are both interest rate-sensitive sectors. We believe with lower interest rates as we move into 2024, loan growth should pick up and help overall profitability despite pressure on net interest margins. In property, we like companies that are progressive in converting their land bank into earning assets, with office property portfolios that are not skewed heavily to the Business Process Outsourcing (BPO) businesses. Over the long term, we fear that AI would disrupt the low-mid end of the BPO business model. 

Less impact from global slowdown

In summary, we expect 2024 will be a year of slower global growth. Even so, we believe the combination of a US soft landing, slowing global inflation and global monetary easing will mean riskier assets perform better. Our view is that one of the best-performing assets at the end of the tightening cycle will be the cycle’s laggards – Emerging Equities.

We advocate our view with a preference for large, domestic-driven markets like Indonesia and the Philippines, where a slowdown in global growth would have less impact. 


1  Allocations are subject to change.

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