JPMorgan-ASEAN Equity Strategy Burned before, be cautious about reb...

Global Research04 June 2023J P M O R G A Nwww.jpmorganmarkets.comEquity Macro ResearchRajiv Batra AC(65) 6882-8151rajiv.j.batra@jpmorgan.comBloomberg JPMA BATRA <GO>J.P. Morgan Securities Singapore Private LimitedKhoi Vu, CFA AC(65) 6882-8170khoi.t.vu@jpmorgan.comJ.P. Morgan Securities Singapore Private LimitedTony SK Lee(852) 2800-8857tony.sk.lee@jpmorgan.comJ.P. Morgan Securities (Asia Pacific) Limited/ J.P. Morgan Broking (Hong Kong) LimitedMSCI ASEAN was down 5% in May and foreign investors sold US$1.2bn equities, in line with our expectation (link). Fund flows shifted from ASEAN to tech sector and India in May. All country and sectors except IT delivered negative returns. Equity markets will likely rebound from oversold levels in coming days driven by extension of the US debt ceiling, Fed skipping June rate hike and potential new measures by Chinese authorities to support the property market to boost economy (link). See our ASEAN high conviction list for key stocks to own. However, this relief rally may be short-lived and foreign outflows continue due to stronger dollar, tightening credit conditions, investors˖ cognitive dissonance, fears of an imminent recession, looming El-Nino and negative earnings revision in cyclical sectors. We believe that quality and defensive plays would be the best place to be. We reiterate our OW recommendation on Consumer Staples, Healthcare, Telecom, REITs and selective utilities names.Fund flows shifted from ASEAN to tech sector and India in May. All countries and sectors except IT delivered negative returns in May driven by currency weakness, external headwinds, fading China growth impulse hurting exporters, slowing domestic demand concern and idiosyncratic factor like Thai elections. Tech sectors gained traction globally on the back widespread re-basing of AI growth expectations in 2023 and beyond. Taiwan saw $5,205bn net inflow vs. outflows of US$2,553mn in April, and Korea recorded US$3,114mn inflow following US$616mn inflow in April. India led the foreign inflow amongst South Asia countries, with US$4,544mn net inflows. Meanwhile, Thailand, Malaysia, Vietnam and the Philippines lagged on US$967mn, US$159mn, US$119mn and US$81mn net outflows, respectively.Cognitive Dissonance – Can EM equities work in an environment in which the US outlook looks increasingly challenging as we advance into 2H23? In essence, global investors are in no hurry to add to EM equities, as long as they believe in: (1) an UW equity at the asset allocation level (link); and (2) fear a double-digit correction in US equities driven by de-rating or lower earnings growth. US HG funds continue to attract steady inflows (May: +US$22.3bn, YTD: +US$128bn). Despite solid fundamentals, lower beta, higher domestic exposure and structural beneficiary of supply chain shift, EM fund managers continue to trim allocation in ASEAN ex Indonesia region (link). Net underweights in Thailand, the Philippines and Malaysia increased to 14 (from 12), 31 (from