Wires

For risk-reward, look beyond Southeast Asian equities

By Viparat Jantraprap

BANGKOK, Oct 11 (Reuters) - Year-to-date stock index gainsin Thailand and the Philippines that are double those on broadAsian and world indexes suggest the easy money may already havebeen made in Southeast Asia.

After benefiting from a strong domestic consumption play,Southeast Asian stocks could now underperform as investorshunting risk shift to markets that are exposed to global growth,encouraged by central banks pumping in liquidity.

Some investors are wary of frothy premiums building up insmaller, illiquid Southeast Asian markets. Others see morepromise in chasing high returns in cheaper markets.

Thailand's benchmark SET index is up 26 percent sofar this year, while the Philippines has gained more than23 percent. The MSCI index of Asia Pacific shares outside Japan

and the world index have risen10-12 percent.

The Philippine and Malaysian stock markets trade at pricemultiples of 17 and 16 respectively, the highest in Asia, whilethe lowest, Chinese and South Korean markets, trade below 10times.

The gains coincide with an economic resurgence in SoutheastAsia as the region of 600 million people defies a stubborndownturn in the United States, Europe and even Asian powerhouseChina, underpinned by an ebullient new middle class and a waveof credit on the back of low interest rates.

"The risk-reward is actually more attractive for a tacticaloverweight in the more cyclical markets," said Soek Ching Kum,head of Southeast Asia equity research at Credit Suisse PrivateBanking in Singapore.

"If you're going to see more evidence of fiscal spending oninfrastructural development in Thailand, I think that will be acatalyst also for the funds to be excited by the market," saidKum. The private bank has a 'neutral' rating on Thailand.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ GRAPHIC: Asia mkts performance GRAPHIC: Asia mkts valuations Reuters Asian FX poll: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> EXTERNAL DEMAND

Southeast Asian markets have performed well in the pastthree years, since the global financial crisis. Jakarta'sComposite Index is up 3.2 times, just ahead of Thailandand the Philippines. The broad MSCI Asia exJapan index has risen1.8 times.

"This is more a story about the improvement in external andglobal demand. Early on, funds were moving out from globalgrowth and high beta to defensive. Now, it's more like buyingback of the high beta once again," said Hong Kong-based Mun HonTham, regional strategist at Maybank Kim Eng Securities.

Indonesia, which saw $6.1 billion in foreign inflows in thethree years to 2011, has gained another $1.8 billion so far thisyear. Thailand took in $2.2 billion this year, after an outflowof $167 million last year in reaction to severe flooding thathit the capital Bangkok and crippled industrial supply routes.

Foreign inflows into Philippine equities have surged to $2.3billion this year from $2 billion in the two years to 2011.

STRONG DRINKS

Companies in Southeast Asia are benefiting from an increasein foreign investment and public spending by governments. Thathas lifted domestic consumption by an expanding middle class.

A screening of some 2,300 companies in Asia with a marketvalue of at least $1 billion shows that six of the biggestgainers by price performance so far this year are from SoutheastAsia. These include Thai food and beverage firm Oishi Group Pcl

and Philippine drinks firm Tandua Holdings Inc.

"It will probably be clearer to think about this in terms ofsector rather than country per se," said Sriyan Pietersz, headof ASEAN and frontier markets research at JP Morgan, whopredicts outperformance by globally oriented, cyclical sectorssuch as petrochemicals, energy and technology.

Southeast Asian investors are already gravitating towardsbetter performing funds.

CIMB strategist Chang Chiou Yi advises investors to look atstocks with a market value of more than $500 million and seesvalue in Singapore's commodities sector, Indonesian banks, Thaipetrochemicals and Malaysia's financials.

"We think the fog has lifted somewhat on the euro zone, butwe're not out of the woods. There's still a lack of convictionin the recovery in global demand. With that in mind, we preferto stick with our value-hunting strategy," she said.

(Additional reporting by Tripti Kalro in BANGALORE; Writing byAnshuman Daga; Editing by Ian Geoghegan)

((viparat.jantraprap@thomsonreuters.com)(+66 2 648 9733))

Keywords: MARKETS SOUTHEASTASIA/