The rally of Asian markets from its low year-to-date has been in tandem with the global economic recovery as investors shift their focus to cyclical markets and sectors over defensive sectors.

Economists believe the worst is now over for ASEAN markets given that earnings have been upturning and markets should continue to sustain the level of earnings growth.

It is supported by the recent earnings results where companies surprised on the upside in general. So, moving forward, how should investors invest for 2H17?

LEVIS Framework (Liquidity, Earnings, Valuation, Interest rates and Sentiment)

LEVIS, an acronym, stands for Liquidity, Earnings, Valuation, Interest Rate Expectations and Sentiment. To determine whether the equity market is improving and presents an opportunity to invest in, CIMB analyses the market using the LEVIS framework.

Ideally, an improving equity market should show signs of improvement in all five of the LEVIS components.

  • (L) There should be ample liquidity with signs of rising.
  • (E) Earnings growth should be positive and strong.
  • (V) Regarding valuation, the forward valuation is of greater importance. The forward valuation should be more attractive, about its peers.
  • (I) The country/market interest rates should continue to stay low to allow for cheaper financing.
  • (S) Last but not least, sentiment should continue to climb, and there should be visible signs of positive market catalysts.

1. Liquidity

Monetary Aggregate

Emerging markets, including ASEAN, seemingly managed to convince investors that worry political events like Brexit and US elections are overdone. As such, US dollars strengthened and funds started pouring back into emerging markets. Even markets that were ignored in the past two to three years like Singapore and Malaysia saw money flow into the equity market.

Seemingly shaking off the worries that affected 2016 (MSCI rebalancing its Emerging Market Indices in Apr 2016, the Brexit event and the US Election outcome, which resulted in the strengthening of the greenback), Emerging markets (EM) globally saw liquidity return in 1Q17.

Based on a 10-year correlation study performed by CIMB, analysts found that liquidity flow has a strong correlation with the performance of the equity market for Malaysia, Indonesia and Thailand. Given the high correlation, CIMB believes that the trend of increasing money flow could be used as leading indicators of market performance in the equity markets.

According to CIMB, Malaysia has already peaked in the change in monetary flows while Singapore is close to peaking. On the other hand, both Indonesia and Thailand shows potential for further upside from improvement in liquidity.

Foreign Fund Inflow

Since Jan 2017, the four ASEAN nations have seen a net inflow of foreign funds into the equity markets. Among the four countries, Thailand saw the smallest increase in net equity fund inflows while Malaysia saw the largest fund inflow to return to ~23 percent of foreign shareholdings. Indonesia, which saw the second-largest equity fund inflows after Malaysia, is expected to draw more funds into Indonesia as its economic fundamentals improve.

Liquidity: Indonesia has the highest rating, followed by Singapore, Malaysia, and Thailand.

2. Earnings

Using a two-year EPS CAGR as a basis for comparison, CIMB notes that Indonesia leads with an average FY17-18F EPS CAGR of 15.7 percent, followed by Thailand with 11.5 percent, then Malaysia (nine percent) and Singapore (seven percent).

Thus, moving forward, CIMB expects Indonesia and Thailand to record the highest and Singapore the lowest earnings growth in 2017-18F considering that both have CAGR of more than 10 percent.

Earnings: Indonesia has the highest rating, followed by Thailand, Malaysia and Singapore.

3. Valuation

Among the four ASEAN countries, Indonesia has the best valuation profile in ASEAN. Its higher relative P/E and P/BV are balanced out by its above-peer-average recurring ROE and highest EPS growth in FY17-18F. On a PEG basis, Indonesia is the only market with a PEG of less than 1.0 at 0.95.

FY16-18F PE

Based on ROE vs. P/BV, Singapore and Thailand appear unattractive given that they lie above the best fit line (see chart below). In comparison, Malaysia and Indonesia seem more attractive. Despite having a pricier regarding P/BV, Indonesia’s ROE is the highest among the four ASEAN countries, making it attractive.


Valuation: Indonesia has the highest rating, followed by Thailand, Malaysia and Singapore.

4. Interest Rate

CIMB foresees little significant changes to the interest rates in Malaysia, Indonesia and Thailand. However, as Singapore is more exposed to the US cycle, CIMB forecasts a six-basis-point increase in benchmark interest rate at end-2017F. According to CIMB’s chief economist, rate hikes will likely be first implemented in Singapore, followed by Indonesia, Thailand and Malaysia.

Interest Rate: Indonesia has the highest rating, followed by Malaysia, Thailand and Singapore.

5. Sentiment

To track the sentiment, CIMB monitors the Consumer Confidence Index of all four ASEAN countries. Based on the Consumer Confidence Index, consumer confidence in both Singapore and Malaysia are still pretty low, reflecting the low level of sentiments.

In Thailand, the passing of King Bhumibol Adulyadej continues to affect people’s mood to spend. Consumer sentiment took a further hit on 13 Oct 2016 when the date for the elections was pushed back to 4Q18F from 2017F.

Indonesia was the only country that registered an increase in Consumer Confidence Index in April, bucking the general trend among the four ASEAN nations. That could be due to several factors, such as “successful government policy reform and amnesty programme, as well as rising commodity prices”. There were also positive surprises regarding corporate earnings among Indonesian companies.

Sentiment: Indonesia has the most positive sentiment while the rest of the ASEAN countries are relatively less positive.

Investors Takeaway: LEVIS strategy points to Indonesia as potential outperformer

Based on CIMB’s LEVIS strategy, Indonesia appears to be the frontrunner as the equity market for investment returns to outperform with Malaysia and Thailand a distant second. In the next part of the series, we will highlight some investment themes that investors can expect to play out in 2H17.

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