(Bloomberg) – A case is being built for Indonesia and India – this year’s top stock markets in emerging Asia – to maintain their edge.
Both markets are benefiting from rebounding domestic demand as the impact of the pandemic fades, with the latest earnings season bringing positive surprises in key sectors. Slowing growth and macroeconomic risks in China are another reason for investors’ preference for these two destinations.
Beyond these common drivers, India is witnessing a return of foreign investors which is energizing a market stimulated by an unprecedented boom in retail investment. In Indonesia, the central bank has so far resisted the global tightening wave to keep rates at a record low, supporting growth as the commodity export boom provides a tailwind.
The Jakarta Composite Index has gained nearly 8% so far in 2022, steadily leading the pack throughout the year. India’s NSE Nifty 50 index jumped 10% in the past month, little changed for the year, but still against the index’s 19% decline MSCI EM Asia.
“I would be surprised if from here, whether in local currency or dollars, both countries don’t outperform,” said Vikas Pershad, portfolio manager at M&G Investments. “The upward earnings story looks quite constructive and the downward flow story in the region and relative macroeconomic uncertainty looks less.”
The resilience of both markets stands out as Asian equities as a whole have lagged their US and European counterparts this year, and MSCI Inc.’s global equities gauge has also fallen double digits.
A stronger dollar and rising global rates have hit tech-heavy markets like South Korea and Taiwan, while China has yet to find bottom as its Covid Zero strategy, a real estate crisis and regulations unpredictable events weigh on stock prices.
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India and Indonesia are the only two Asian markets with “Chinese isolation” as they have exhibited a negative return correlation with the MSCI China Index for the past two years based on monthly returns, wrote Goldman Sachs Group Inc. strategists in an Aug. 3. Remark.
Other banks have cited Indonesia, with its large domestic market and strength in energy exports, as having withstood U.S. down cycles in the past. India’s progress has accelerated in recent weeks as foreign flows turned positive for the first time in months.
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Several banks in India – a sector that accounts for more than a quarter of the Nifty 50 gauge – beat earnings estimates for the last quarter due to higher demand for mortgages and loans. After falling from their July highs, forward earnings estimates for the Nifty Gauge have started to climb again.
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Certainly, with the Reserve Bank of India’s half-point rate hike on Friday, the central bank’s hawkish stance and inflationary pressures are headwinds.
In Indonesia, however, the economy appears to be in a rare sweet spot. Core inflation is below 3%, giving the central bank room to hold rates a bit longer. And with growth in the last quarter exceeding estimates for reopening and booming exports, it recorded the highest net foreign inflows this year among developing Asian markets – $3.8 billion. Future earnings estimates for the equity benchmark have also stabilized.
“Better results, better flows in the case of India, a depreciating but not extremely volatile Indonesian currency paves the way for these two economies to outperform,” said Zhikai Chen, head of equities. Asian and global emerging markets at BNP Paribas Asset Management. .
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