Politics Drive Investment Divide In Southeast Asia’s Top Markets

Political upheaval is driving a split in Southeast Asia’s financial landscape, as investors bet that the worst may finally be over in Thailand but only just getting started in Indonesia.

Foreign investors have pulled $653 million from Indonesia’s stock market this month, the worst period of selling since April as violent protests and the abrupt replacement of the finance minister rock the country. Thailand’s long beleaguered stock market looks set to reap the benefit: Aberdeen Investments, Gama Asset Management and Valverde Investment Partners now say the market stands out as the hot pick among the two, and a prolonged exodus of foreign funds has slowed to a trickle.

The moves underscore the shifting environment for emerging market funds investing in Southeast Asia, long a region defined as much by political turmoil as economic opportunity. While Thailand has for years been roiled by changing governments and civil unrest, Indonesia has been a relative source of stability. That is now starting to change, forcing investors to reconsider their approach to both countries.

“Thailand is seen as coming from the bottom toward stabilizing as the new cabinet gets formed, but Indonesia seems to be heading the opposite direction — from bad to worse,” said Xin-Yao Ng, a fund manager at Aberdeen Investments, adding that he is now increasing his exposure to Thailand while remaining underweight Indonesian assets.

Driving much of the optimism in Thailand is a political transition after a new prime minister took office. Anutin Charnvirakul, a conservative who was elected after his predecessor was ousted for ethical violations, is considering reviving a Covid-era co-payment subsidy program to stimulate consumption.

The baht has gained about 2% against the dollar this month, making it the strongest performer so far among Asian currencies, Bloomberg-compiled data show. 

The stock benchmark SET Index has climbed more than 4% this month to a seven-month high, while foreign investors’ pace of selling equities has slowed. They’ve unloaded $21 million of Thai shares so far in September after they dumped $670 million in August, according to Bloomberg-compiled data. 

Improved sentiment could push the index to 1,340 by year-end, according to Prakit Siriwattanakage, managing director at Merchant Partners Asset Management. Inflows into the stock market will also support the baht, he said.

Thailand’s relatively strong fiscal position gives it room to stimulate the economy and target areas in need of support, said John Foo, founder of Valverde Investment Partners, noting Thai stocks’ favorable valuations after past selloffs. 

“This is an opportunity to overweight Thailand amid an improving political and economic climate,” he said.

Indonesia paints a very different picture. President Prabowo Subianto’s abrupt replacement of Sri Mulyani Indrawati with Purbaya Yudhi Sadewa has rattled markets. Indrawati was well-respected among global investors, while her successor — despite pledges to be prudent — is little known.

“Indonesia is undergoing a period of heightened economic uncertainty,” said Jason DeVito lead portfolio manager for emerging market debt at Federated Hermes. The political changes “will introduce a degree unpredictability for investors, particularly given Sri’s longstanding role in shaping the country’s reputation for fiscal discipline.”

Indonesia plans to inject about 200 trillion rupiah ($12 billion) into the banking system to help boost lending and growth, drawing from 400 trillion rupiah in cash reserves built up through past underspending. But concerns over fiscal direction had been brewing for months, as Prabowo pushed populist measures like a free school-lunch program. 

Indonesia’s economy broadly remains weak, and the one-off stimulus only offers short-term relief, said Valverde’s Foo.

Such concerns over Indonesia’s fiscal health are showing up in the bond market, where the yield curve — the gap between two- and 10-year bonds — hovers close to the steepest in more than two years. The rupiah’s recent decline extended its loss against the dollar this year to more than 1.5%, making it the worst-performing currency in Asia after the Indian rupee. 

Purbaya is doing his best to win investors’ approval. Just days after pledging the $12 billion injection to state banks, the finance minister made clear the government would add more if it was needed. The central bank has also been called in to help, with a so-called burden sharing agreement designed to support growth. But so far, foreign fund managers remain unconvinced.

“The Indonesian government still has a lot to prove,” said Aberdeen’s Ng. “I’ve actually been funding Thailand from more expensive markets by taking profit from China, Korea and tech in Taiwan.”