On September 18, the U.S. Federal Reserve announced a 50-basis-point cut to the federal funds rate, signaling a shift from a tightening to a loosening monetary policy cycle. Interest rates above 5% will gradually disappear, and U.S. dollar deposit rates will also begin to decline. This shift presents opportunities for other global markets, with Southeast Asia being one of them.
Even before the rate cut, international capital markets had been preparing for the Fed’s move, turning their attention to emerging economies with greater potential for value and returns, with Southeast Asia as a popular choice. Economists have noted that over the past two months, fund managers increased their holdings of sovereign bonds from Thailand, Indonesia, and Malaysia. They have also been net buyers of stocks in Indonesia, Malaysia, and the Philippines for the past three months. These capital inflows have boosted Southeast Asian currencies and helped the region’s stock markets outperform others this quarter. With expectations of further Fed rate cuts remaining high, the trend of capital inflows into Southeast Asia is likely to continue in the short term.
Meanwhile, central banks in Southeast Asia are on the verge of their own rate-cutting cycles, with some already taking action. For instance, the Philippines eased its monetary policy in August, and Indonesia lowered key interest rates in anticipation of the Fed’s rate cuts. Many experts predict that Thailand will follow suit later this year. Beyond Southeast Asia, countries in South and East Asia are also moving preemptively. Pakistan lowered rates in early September, ahead of the Fed, while JPMorgan expects India to cut rates next month, and South Korea’s central bank is expected to take action before the end of the year. Countries have prepared policies in advance of the Fed’s rate cut, creating space for further international capital inflows.
Investors hold a positive outlook on Southeast Asia. Zhang Jingge, Head of Investment at Amundi Singapore, said, “In the medium term, we remain optimistic about Southeast Asian bonds and currencies, especially in higher-yielding countries. Real interest rates in Southeast Asian economies are higher than a year ago, indicating room for easing, which is likely to benefit local bond markets.” BlackRock also expressed a preference for medium- to long-term bonds in the Philippines and Indonesia, noting that their central banks have more room for monetary easing. A company executive described this period as the “golden age of fixed income in Asia, especially in emerging Asian markets.”
It remains to be seen whether Southeast Asian countries can seize the opportunities created by the Fed’s rate cut. As representatives of emerging markets, Southeast Asia’s economies have distinct advantages and challenges. On the positive side, cheap labor and significant market potential attract substantial capital. However, some countries’ market mechanisms are still developing, and local traditional manufacturing and high-tech industries are in their growth stages, leaving some industry insiders uncertain about whether these nations can fully capitalize on the Fed’s rate cut. Global competition, as well as the region’s vulnerability to geopolitical and international factors, also raises questions for investors about potentially better alternatives.
Globally, Southeast Asian currencies have significant upward potential, and the region is likely to remain attractive to major capital investors in the short term. However, the ability of Southeast Asia’s bonds, stocks, and industries to meet international capital demand will depend on whether these countries can leverage their industries to create sufficient value.
