ASEAN - Brexit could be positive for ASEAN if Fed delays rate hike

SINGAPORE -- Brexit may indirectly have a positive impact on Southeast Asian equity and currency markets, as market volatility and uncertainty surrounding the U.K.'s decision to leave the European Union will likely push the next U.S. Fed rate hike back, according to analysts in the region.

Expectations that the Fed will delay its rate hike are shared among a number of analysts in Southeast Asia, who believe the delay could help minimize capital outflows from Asian markets. "Under the leadership of Chair [Janet] Yellen, the Fed seems particularly attentive to downside risks," said Sim Moh Siong, senior currency strategist at Bank of Singapore, in a recent report. "The market could further push back Fed rate hike expectations to December or beyond, which is U.S. dollar negative" against Asian currencies, he added.

OANDA Asia Pacific's Senior Market Analyst Jeffrey Halley said there is "an increasing unlikelihood of a Fed hike," which will allow Asian currencies to remain stable. "Even if they hike, there will be one and done [before] early 2017." He added that central banks including the People's Bank of China and the Fed "have their trigger fingers over the liquidity button" if the situations in the U.K. and Europe deteriorate. "This will support emerging market assets on any dips," he said.

Meanwhile, DBS's Senior Currency Economist Philip Wee said Brexit has not changed the bank's expectation of two Fed rate hikes in September and December. "We are, nonetheless, closely monitoring the developments in U.K. and EU before deciding whether revisions are needed," he said.

For equities, a number of analysts shared views that markets in the Association of Southeast Asian Nations will gain in the latter half of the year.

Nomura views that the expected greater policy accommodation from global central banks, along with Southeast Asia's relatively low trade exposure to Europe and strong economic growth prospects, should allow ASEAN equity markets to outperform. "Outflows from ASEAN equities have peaked and we expect a period of inflows on the back of lower return expectations in Europe and Japan," said its recent report.

Capital Economics' Asia economist Krystal Tan expects equity markets in emerging Asia to rise further over the next 12 to 18 months, given the "decent growth prospects, loose monetary policy and healthy valuations," she said.

Within Southeast Asia, Nomura named Indonesia and Malaysia equities as "overweight" in a recent report, citing progress in tax amnesty policy in Indonesia, and upside potential for undervalued counters in Malaysia. Camilia Goh, executive director of equity research at Bank of Singapore, named Indonesian infrastructure and property counters including Bumi Serpong Damai.

As for Philippine equities, Nomura said it is "neutral" as the current valuations are "very toppy." Bank of Singapore's Goh said the bank will maintain its "selective stance" toward Philippines counters, naming stocks such as conglomerate Ayala Corp. and property company Megaworld as its preferred picks.

The biggest risk factors include global risk-off movement induced by extreme and prolonged market volatility, which will likely occur if political uncertainty continues within Europe and beyond. "Elevated market volatility could trigger more portfolio outflows in Asia, particularly on the equity side," said Bank of Singapore's Sim.

Tomomi Kikuchi

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