Thursday, February 16, 2012

>ASEAN EQUITY STRATEGY: Impact of Ownership Levels on Fund Flows

 Investment conclusion: The key investor concern during our recent meetings was related to the high level of ownership in ASEAN, particularly Indonesia (351 bps OW ASEAN and 199 bps OW Indonesia compared to the MSCI benchmarks). We believe that fundamentals should drive flows/ownership levels and not vice versa. Our analysis suggests that FII flows do not seem to be entirely contingent on ownership levels, as MSCI weights have undergone paradigm shifts driven by underlying changes in economic and capital market fundamentals. In this report, we assess flows and ownership levels in detail. We reiterate our order of country preference as Indonesia followed by Thailand, and Singapore as least preferred.

■ Learning from India’s experience: In 1996, MSCI India’s weight at 4.5% was actually lower than MSCI Indonesia’s 5.8%. But in the next 10 years, India’s weight rose to 13.1% in 2006, whereas MSCI Indonesia’s weight fell to 2.2%. In 2002, Indonesia received USD 864mn of FII inflow, 17% higher than what India received in that year. However, in the subsequent five years, India received a cumulative FII inflow of around USD 52.3bn which was nearly 7.4x Indonesia’s FII inflows. Even though investor OW position (based on EPFR data) was high, at 261 bps at the end of 2009, India’s net FII inflows still peaked out only in 2010 at USD 29.3bn.

■ Learning from Indonesia’s experience: MSCI ASEAN weight in AxJ shrank from 37.4% in 1990 to 13.9% in 2010. However, MSCI Indonesia’s weight in MSCI AxJ has risen from 1.8% to 3.8% during 2000-11, and its weight in MSCI ASEAN has risen from 8.1% to 24.1%. During the last 5 years, despite the average OW position of 110 bps in Indonesia compared to the MSCI benchmark weight, the average annual FII inflow has been USD 2.2bn p.a., as Indonesia’s MSCI weight climbed steadily from 2.7% to 3.8% and its OW position climbed from 139 bps to 199 bps. Interestingly, Indonesia’s market is not the most OW within ASEAN. Based on the most recent EPFR data, investor OW position at 684 bps in Thailand is highest, followed by Singapore and Indonesia, at 208 bps and 199 bps, respectively.

To read full strategy:  ASEAN EQUITY STRATEGY