(Bloomberg) — A case is taking shape for Indonesia and India — this year’s leading stock markets in emerging Asia — to maintain their edge.
Both markets are benefiting from domestic demand recovering as the impact of the pandemic fades, with the latest earnings season bringing positive surprises in key sectors. Slower growth and macro risks in China are another reason why investors prefer these two destinations.
Besides these common drivers, India is seeing a return of foreign investors who are charging a market buoyed by an unprecedented boom in retail investment. In Indonesia, the central bank has so far bucked the global tightening wave to keep interest rates at a record low, providing a boost to growth as the commodity export boom provides a tailwind.
The Jakarta Composite Index has gained nearly 8% so far in 2022, leading the group steadily throughout the year. India’s NSE Nifty 50 rose 10% in the last month only to change little for the year, still matching the 19% decline in the MSCI EM Asia Index.
“I would be surprised if the two countries did not outperform from here, either in local currency or in dollars,” said Vikas Bershad, portfolio manager at M&G Investments. “The story of bottom-up earnings looks very constructive and the story of top-down flows in the region and overall relative uncertainty looks less.”
The resilience of the two markets stands out as Asian stocks as a whole have lagged behind their US and European peers this year, and the MSCI Inc. global stocks by 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 a bottom, as Covid Zero strategy, a real estate crisis and unexpected regulations weigh on stock prices.
Read: Taiwan risks bring another hot day for Chinese stock market
India and Indonesia are the only two Asian markets that have “China isolate,” which have posted a negative yield correlation with the MSCI China Index over the past two years based on monthly returns, Goldman Sachs Group Inc., strategists wrote. On August 3rd. note.
Other banks have cited Indonesia, with its large domestic market and energy export strength, as a survivor of American bicycles in the past. India’s progress has gained momentum in recent weeks as foreign inflows turn positive for the first time in months.
Read: Asia’s best-performing market likely to rise: Valuation
Several banks in India – a sector that makes up more than a quarter of the Nifty 50 scale – beat earnings estimates for the fourth quarter due to higher demand for mortgages and loans. After dropping from July highs, Nifty gauge futures earnings estimates are starting to rise again.
READ: Recession fears see fund manager’s $85 billion bet on India stocks
To be sure, with the Reserve Bank of India raising interest rates by half a point on Friday, the central bank’s hawkish stance and inflationary pressures are headwinds.
But in Indonesia, the economy appears to be in a rare sweet spot. Core inflation is below 3%, which gives the central bank room to hold rates a little longer. With last quarter’s growth outpacing estimates for exports to reopen and boom, it had the highest net foreign inflows this year among developing Asian markets – $3.8 billion. Estimates of future earnings for the stock index also stabilized.
said Zhikai Chen, Head of Emerging Asian and Global Equity Markets at BNP Paribas Asset Management.