Investors are becoming increasingly picky about which bonds and stocks they buy in Southeast Asia's fast-growing economies as the risk of policy bungling makes them more discerning.
The ebb and flow of cash from money managers and retail investors into Indonesia, the Philippines, Thailand and Malaysia is still on balance an inflow into these markets. The dynamics have however changed, with marked differences between countries.
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Unlike in 2011 or 2012 when the simple risk-on and risk-off switches could trigger flows in and out of the region, investors are a lot more discriminating.
Malaysia, conventionally a flight-to-safety market, is in demand at the conclusion of a tight election, but high-yielding Indonesian rupiah bonds are also sought after, despite a recent downgrade in its sovereign ratings outlook.
The Philippines continues to impress markets with growth rates and reform talk. The country even got a surprisingly early upgrade to investment grade last month. Yet, investors find Philippine bonds and stocks expensive, and don't want to bear the risk of those promised reforms being derailed.
High-yielding Thailand, meanwhile, is giving foreign investors cold feet with talk of capital controls and a public feud between the central bank and finance minister over what to do about the strong baht. Some have pulled money out. Others are staying invested in Thai bonds to ensure they get the benefit of a possible rate cut.
But, the region is undoubtedly in flavour. Citibank reported, using data from fund tracker EPFR, that Asian regional funds excluding Japan were the only ones with meaningful inflows last week, receiving $386 million, wheras Greater China funds saw $302 million of outflows.
And data compiled by ANZ Bank showed Malaysia received $144 million and Indonesia $161 million in the week to May 8, the highest in Southeast Asia. Thailand got $132 million and the Philippines just $102 million.
"You want to invest where the policymakers are going to be helpful," said Gary Dugan, chief investment officer at Coutts private bank.
Coutts is underweight the Philippines, hesitantly invested in Thailand and underweight Indonesia, where Dugan believes there is a risk that interest rates will have to be increased as policymakers fumble over a much-needed decision to reduce fuel subsidies.
Being fussy isn't an option for many investors, particularly for benchmark-tracking fund managers, in a world of scarce growth and earnings.
That explains why money continues to seek Indonesian and Thai assets, despite signs these markets are frothy, as they should be after a few years of extremely loose central bank policies across developed markets.
Foreigners hold a record 34.4 percent of Indonesian government bonds.
"Foreign investors have maintained an underweight position in Indonesia but are net buyers because emerging market funds get sizeable inflows," said Ashish Agrawal, a rates strategist at Credit Suisse.
"In some sense they are reluctant buyers of bonds. Everyone is focused on the implication of measures taken, if any, to reduce fuel subsidies, something that the rating agencies have also highlighted."
Still, at the margin, foreign investors prefer Indonesia to the more expensive Philippines, where the equity market trades at nearly 18 times the 2013 earnings, which is hard to justify for an economy growing at 7 percent.
Likewise, their dollar bonds carry lofty prices, even after accounting for the superior Philippine rating. Philippine bonds due 2037 are trading at a spread of 66 basis points over U.S. Treasuries, compared with Indonesian bonds due the same year and at a spread of 153 bps.
In April, Indonesia saw inflows of $1.848 billion while Philippines saw outflows of $449 million.
But valuations pose less of a risk than the possibilities for unexpected policy moves, such as that of Thailand cutting rates to deter hot money or of the Philippines or Thailand imposing capital controls.
"The greater risk going forward is that one day you wake up and find the currency has adjusted by 4-5 percentage points," said Dugan. (Additional reporting by Masayuki Kitano in Singapore and Vikram Subhedar in Hong Kong; Editing by Simon Cameron-Moore)