ASEAN: Brace for market volatility when the global carry trade unwinds, warned Nomura Securities.

ASEAN did pretty well when global equities were sold in early September (see graph) because that correction was “due to softening of global growth prospects than expectations of tighter policy”, wrote analyst Mixo Das and team.

Looking forward, Nomura was less optimistic, because any sell-off would come from an unwinding of the global carry trade. U.S. investors, for instance, could pull their money from overseas to invest at home when the U.S. interest rates arise. ASEAN historically was more affected than North Asia because its markets were smaller.

Dollar strengthened broadly since September, but Nomura said the stronger dollar so far was due entirely to divergent monetary policies between the US and Japan and EU. The broker saw the dollar to rise further, as global liquidity for the greenback dries up.

As such, within ASEAN, Nomura said we should stay defensive, on Malaysia and Singapore, both in the past having been “more insulated from the impact of foreign capital movement given their lower beta nature, strong presence of local capital (and government-owned funds in Malaysia), more developed capital markets and markets’ greater confidence in their policy-makers.”

“Thailand is currently less exposed to foreign capital outflows than the Philippines or Indonesia. Over the past year, Thailand has seen sizeable foreign capital outflows already, whereas both Indonesia and the Philippines have seen significant inflows.”

Nomura was most cautious towards Indonesia, citing that its political outlook was worsening. Here are the analysts:

The opposition has thus proven more united than our previous expectation and appears bent on using every possible mechanism to deter and derail Jokowi’s potentially progressive reforms (at least in terms of governance, budget management and infrastructure development) in an attempt to undermine his presidency.

Foreign buying has been a key support for the Indonesian market all year, and we believe hopes of such investors that Jokowi will be able to deliver despite the adversity has been somewhat set back by recent events.

Earlier this week, Credit Suisse raised its outlook for Thailand and downgraded Indonesia.

Month-to-date, the iShares MSCI Indonesia ETF (EIDO) lost 2.3%, the iShares MSCI Thailand Capped ETF (THD) fell 2.5%, the iShares MSCI Singapore ETF (EWS) lost 0.3%, the iShares MSCI Philippines ETF (EPHE) rose 0.2%, and the iShares MSCI Malaysia ETF (EWM) was little changed.

Except for Malaysia, ASEAN rose today on a dovish Fed overnight. The FTSE Strait Times gained 0.7%, the Thailand SET Index rose 0.7%, the Indonesia Southeast Composite Index rallied 1%, and the Philippines PSE Index was up 0.3%. The FTSE Bursa Malaysia Index fell 0.5%. –