SINGAPORE/TOKYO -- Southeast Asia's financial markets are attracting an influx of investor funds as the region commences a long-awaited economic reopening.
The Malaysian ringgit surged to the 4.13-per-dollar range on Friday, strengthening to a level not seen since Sept. 10. In mid-October, the Indonesian rupiah approached 14,000 per dollar, touching an eight-month high.
The resilience displayed by Southeast Asian currencies contrasts with other emerging-economy currencies, such as the Brazilian real and the South African rand, which have weakened amid growing expectations that the U.S. Federal Reserve will begin to normalize monetary policy.
The same pattern can be observed in equity performance. The MSCI ASEAN Index has climbed since the beginning of last month. In mid-October, the index hit a high not seen since February of last year when the coronavirus pandemic emerged.
The Malaysian and Indonesian stock markets drew a net inflow of funds from foreign investors for four consecutive weeks in October, according to MIDF Research, a Malaysian analytics firm.
Southeast Asian currencies and stocks had turned in lackluster performances until September, then took an upward swing the next month. The biggest reason for the turnaround has been the reopening of the region's economies.
With infection rates in many countries having trended downward, Singapore and Malaysia lifted international travel restrictions for fully vaccinated people in early October. Malaysia opened up interstate travel as well.
Thailand on Monday ended quarantine requirements for fully vaccinated tourists from 63 nations and territories meeting certain conditions. This is among other reopening schemes the country is rolling out.
In addition, the resumption of factory activities in Southeast Asia has boosted exports. The region is headed toward resolving the supply-chain crunch caused by production cuts.
Malaysia exports in September jumped 24.7% on the year to 110.8 billion ringgit ($26.6 billion), marking a new all-time high for a single month. Exports to the U.S., China and members of the Association of Southeast Asian Nations were strong, resulting in a record trade surplus by value.
Indonesia, like Malaysia, is a resource producer that benefited from the commodities rally. Indonesia's exports and trade surplus broke records in August, and the trade surplus remained high in September.
Meanwhile, companies that rely on the tourism industry are widely expected to improve on earnings battered by the pandemic.
Shares for Malaysian budget carrier AirAsia Group have gained 7% since the end of September. Resort developer Genting Singapore rose by 8%. Both companies outperformed the MSCI ASEAN Index's 3% uptick during the same period.
Large banks, such as Singapore's DBS Group Holdings and United Overseas Bank, have also staged a comeback in the stock market thanks to the brightening prospects for its borrowers.
An expansion of quarantine-free international tourism would fuel demand for local currency. A burgeoning trade surplus means expanded sales of foreign currency in exchange for the local currency, which enhances the value of the latter.
Furthermore, Southeast Asia's service sector is highly dependent on tourism, and the manufacturing industry hinges on a high volume of exports. These factors are buoying rallies in the region's currency and stock markets.
"In addition to the economic reopening, inflation rates in ASEAN are not as high compared with other emerging countries, and monetary tightening is not expected to occur very soon, so [ASEAN] has become relatively attractive" for investors, said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities.
Southeast Asia's economic reopening is finally gaining steam after lagging behind China, Europe and the U.S. This development has prompted elevated growth projections for the region.
The International Monetary Fund forecasts that the five major ASEAN economies will expand 5.8% in 2022, which would exceed the 5.6% growth forecast for China.
If the projection holds, it would be the first time Southeast Asia's economic growth exceeded that of China in 32 years. That reversal is forecast to continue through 2023 and beyond.
Major ASEAN economies are "at the early stage of the online shift and tech adoption, with e-commerce penetration rates still below 10%," said Chua Hak Bin, senior economist at Maybank Kim Eng Research. For those economies, the "working age population will only peak in 2045," Chua added, underscoring the large potential for growth.
Meanwhile, the Chinese government's regulatory clampdown has caused investors in advanced nations to rethink risks . If those funds are redirected to Southeast Asia, it would lift the market further.
Yet as China is ASEAN's largest trading partner, an economic slowdown in the country would translate into lower exports from the economic bloc and a declining growth rate in the region.
Depending on the U.S. Fed's decision, Southeast Asia's central banks would be forced to raise their own rates next year, which would have a chilling economic effect.