A record month of redemption from equity mutual funds invested in Southeast Asia suggests a boom in these markets could be over as money managers look elsewhere for value with their sights set on China and India.
Pricy share valuations in Southeast Asia are steering the funds to cheaper markets after a bull run in which the Philippines and Thailand were some of the best performers in the world.
Investors cashed out a record net $505 million from equity mutual funds investing across Southeast Asia in October, a Reuters analysis of Lipper data shows.
It marked a major turning point. They had been net buyers each month up to July, before pulling out a slight $1 million in August and $2 million in September and then cashing out in earnest in October.
Net flows into offshore funds investing in Indonesia, which had attracted about $1 billion earlier in 2012, turned into outflows on a year-to-date basis in October.
"There are a lot of great companies in ASEAN. But as a market, the region is looking pretty fairly valued," said Bill Maldonado who oversees about $80 billion as the chief investment officer in Asia-Pacific for HSBC Global Asset Management.
"We believe very strongly that targeting growth at the expense of a focus on valuation is not a winning strategy," said Maldonado, whose fund company has gone underweight on Southeast Asian shares and overweight on China.
(Read More: China and India Will Dominate Headlines from Asia)
The IBES MSCI China and India indexes are trading 18 percent and 2 percent below their 10-year median forward 12-month price-to-earnings ratio, a measure of relative value.
Similar ratios for the Philippines and Thailand are 25 percent and 11 percent above the median, respectively.Southeast Asia's relatively small equity markets make them vulnerable to shifts in foreign investment flows.
Of some 60 funds focused on Southeast Asia, the top three by size manage more than half of the total assets under management. These three funds had net outflows worth about $600 million in the last two months. The biggest, Fidelity Funds-ASEAN, had estimated net outflows of $350 million, Lipper data show.
Southeast Asian markets are unlikely to outperform in 2013 but fund managers do not expect a regional meltdown, citing support from local investors, especially in Malaysia and Indonesia, and relatively strong regional economies.
Flows into pan-Asia funds, particularly exchange-traded funds, would also mean some allocation to Southeast Asia as seen recently with flows into Asia for week ended Dec. 12 at $2 billion, the highest since 2010, data from Citigroup showed.
Southeast Asian markets have provided a relative safe haven since the global financial crisis as markets and economies in other parts of the world have faltered. Economic growth has been resilient, helped by demand from an expanding middle class.
Philippines stocks across the board have rallied 29 percent this year up to Dec. 13. In Thailand, stocks have rallied 36 percent, data from StarMine, a Thomson Reuters company, shows.
Consumer sector stocks such as Indonesian retailer Hero Supermarket, Thailand's Serm Suk and Philippines-based food and beverage company RFM have more than tripled in value so far this year.
The euphoria propelled the cash managed by Southeast Asian offshore mutual and exchange-traded funds to a record $27 billion earlier this year. Seven funds focusing on Southeast Asia are among the top-100 performers in the world, an analysis of nearly 27,000 equity mutual funds tracked by Lipper shows.
After the buying spree, Indonesia at 3.1 times book value is the most expensive market in Asia, followed by the Philippines and Thailand.
Return on equity in the three countries have dropped in the last year and earnings growth estimates are being revised downwards, particularly in Thailand and Malaysia.
"Within ASEAN, we are outright underweight Philippines, which has fantastic macro but it's extremely overbought and extremely expensive," said Jonathan Garner, chief Asia and emerging market equity strategist at Morgan Stanley.
"Overall, we prefer North Asia. We have China as our significant overweight," he said.
China-focused exchange-traded funds (ETFs) have attracted nearly a net $5 billion in the last two months, the strongest pace since 2008. Net flows into actively managed offshore China equity mutual funds also turned positive in November for the first time since February.
Indian ETFs have collected about $440 million this year, more than half of which came in the last two months. Mutual funds are still experiencing net outflows but the pace has slowed in the last three months, Lipper data showed.
The swing back to China coincides with brighter prospects for the economy. Industrial output and retail sales both rose in November at their fastest annual pace in eight months, the latest data shows, reinforcing the view growth in the world's second-biggest economy is finally picking up after a long slide.
Some bet India's economy is turning the corner as well, especially after manufacturing output in October grew the most in more than a year.
Andrew Swan, who manages about $3 billion as the head of Asian equities for the world's biggest money manager, BlackRock, said cheap financial and infrastructure shares were the best way to benefit from India's potential rebound.
(Read More: Why India Struggles to Deliver Its Growth Potential)
HSBC's Maldonado picked Chinese financial, consumer cyclical, materials and energy sector stocks as his top bets. "The trend, which we are keeping an eye on, is that there has been strong insider selling in these markets (Southeast Asia)," Swan said. "That's perhaps a sign that perhaps we are at the peak of the market for the near term," said Swan, who is underweight on Malaysia and neutral on Southeast Asia, adding that regional shares were due for a correction.