A combination of Delta variant surge and low vaccination rates has made Southeast Asia the world's worst virus hotspot and its financial markets are feeling the brunt.
Stocks have slumped as deaths in the region soar, with benchmarks in the Philippines and Vietnam leading global declines over the past month. Del Monte Philippines delayed its initial public offering this week citing market volatility from rising caseloads, and some analysts are expecting more losses to Thai currencies that have lagged the broader region this quarter, with the Southeast Asian baht at its weakest since 2018.
Investors the key sticking point before looking at to bet on recovery is low vaccinations, with many nations in the region still to get out of single digits in terms of percentage of population fully inoculated. That is leading to reinstated reopenings and delayed mobility restrictions - a divergence from the rest of the world - exemplified by Indonesia suddenly ditching a target for herd immunity.
'The Asean markets are failing because it hasn't reached the 70% vaccination required to slow Covid - 19 infections, said Alan Richardson, senior portfolio manager at Samsung Asset Management Ltd. 'Mass vaccination is the only way to return to sustained re-opening because virus is endemic.
How does the virus surge of 14 December impact Southeast Asian markets?
Even in the global stock market that is lagging an Asean counterpart, Asian shares stand out for their underperformance. This year, the MSCI Asia Pacific Index has fallen more than 5%, compared to an about 1% rise in the regional benchmark MSCI Asean Index. The MSCI AC World index is up 13%.
Further negative GDP revisions are likely, said Arun Sai, senior multi-asset strategist at Pictet Asset Management in London. 'The momentum of our emerging indicators places Thailand, Philippines, Malaysia and Singapore in the bottom half of the leading markets.
Underscoring the importance of vaccinations, Singapore's global benchmark is beating the trend with year-to-date gains of 12%. The island nation fully inoculated more than 60% of its population.
Southeast Asian bonds from Thailand, Philippines and Malaysia all took a hit, with local total return indexes in dollar terms down about 1% since June. Investors fear the Government will have to incur more debt to provide relief to the latest outbreaks and curb the latest damages to businesses and individuals.
There are bright spots, but not every one is a bright spot. Last month Indonesia made its net bond production target for the year to make its higher-yielding currency notes even more attractive in a time of limited U.S. yields. Since 30 June the securities have handed investors a return of more than 3%.
Malaysia's ringgit and Thai peso have fell nearly 2% and 3% against the greenback this quarter, while the Philippine baht is among the worst-performing currencies in the world after its weakening almost 4%.
Given the long gap in output in the Asean economies that are expected to persist, 'we now anticipate further depreciation for these currencies in the coming months, HSBC Holdings Plc analysts including Paul Mackel wrote in a recent note.
For Alvin Tan, head of Asia currency strategy at RBC Capital Markets in Hong Kong, the strategy now is to set levels at where investors would buy the currencies on further weakness. He recommends selling the dollar against Malaysia's rupiah at about 14,550 and against Indonesia's ringgit at 4.30.
At present, not every asset class has come under pressure. Southeast Asia's government debt is resilient against its regional equivalents due to a higher proportion of investment grade notes and backed issuers. The higher yield on Chinese corporate debt has jumped to Southeast Asian peers in at least three years, reflecting an upward trend on Asian debt.
'Given the tighter policy headwinds in Hong Kong, exposure to Asean markets helps to diversify Asia fixed-income portfolios, said Sheldon Chan, portfolio manager of T. Rowe Price's Asia Credit Bond Strategy in China. Despite the threat of virus variants and a slower vaccine rollout on overall growth prospects, we still remain convinced that the region as a whole remains reasonably well-buffered against external vulnerabilities.