Small markets steal limelight as global equities rally broadens

After being sidelined by investors for much of this year, some smaller equity markets are suddenly winning favour, according to Bloomberg.

The trend is particularly evident in Asia, where Thailand, Singapore and New Zealand rank as the top performers in September. Their benchmarks have risen at least 3.0 per cent each so far, even as MSCI Inc’s gauge of global stocks has fallen about 1.0 per cent following a four-month winning streak.

Investor focus seems to be shifting as the world’s biggest equity markets such as the US, Japan and India take a breather, and China’s slump deepens. For many of the smaller Asian markets, a limited exposure to the artificial intelligence theme means their valuations aren’t expensive, making them attractive just as the Federal Reserve’s dovish pivot helps boost their currencies and allows some central banks to embark on rate cuts.

“Some investors are seeking diversification away from larger, more volatile markets, leading to increased capital inflows into smaller ones,” said Manish Bhargava, chief executive officer at Straits Investment Management in Singapore. “The desire is maybe to mitigate risks associated with larger economies and to tap into the growth potential of smaller markets.”

The outperformance of under-appreciated markets in an otherwise challenging September isn’t just an Asia phenomenon. Equity indexes in Argentina, Lebanon and Zambia also rank among the world’s top performers this month in a list of more than 90 global gauges tracked by Bloomberg. In Asia, foreigners are on course to mark a fifth consecutive week of inflows into Southeast Asian stocks.

Meanwhile, volatility has been picking up in the US as traders debate the pace of the Fed’s easing, the outcome of the US election and whether the AI boom has run its course. In Japan, the yen’s strength has halted a record-breaking stock rally as the Bank of Japan prepares for another rate hike. India is also grappling with valuation concerns after world-beating gains.

The tech-heavy markets of South Korea and Taiwan have both witnessed foreign outflows from stocks this month amid uncertainty over the outlook for AI-linked shares.

Some of the smaller economies meanwhile are enjoying local tailwinds, such as Thailand’s return to political stability and Singapore’s focus on REITs, a sector that benefits from lower global rates.

And valuations are clearly in their favor, even after the latest gains. Benchmarks for Thailand, Singapore and the Philippines are trading at less than 15 times their 12-month forward earnings estimates, and all below their three-year average ratios. That compares with a multiple of more than 17 for the MSCI global gauge and ratios in excess of 20 for the S&P 500 and India’s NSE Nifty 50 indexes.

Asia has seen some economies already easing monetary policy before the Fed, as a softening dollar gives central banks the room to focus on supporting economic growth.

The Reserve Bank of New Zealand lowered rates last month in an earlier-than-expected move. Bets that it will ease further and faster have bolstered the country’s equity benchmark. The Philippines also slashed rates for the first time in almost four years and signaled there’s more easing to come, while Indonesia and Thailand are widely expected to ease in the fourth quarter.

“The hope is that with US interest-rate cuts and a dollar that is biased toward weakness, the smaller countries can act a bit independently on interest policy,” said Gary Dugan, chief executive officer of the Global CIO Office.

To be sure, the size of these markets and a relatively limited pool of large-cap stocks can be a deterrent for long-term investors like pension funds, and can thus restrict the potential for large foreign capital inflows. Also, their outperformance may prove fleeting if a revival in risk sentiment rejuvenates the global AI frenzy.