J.P. Morgan: ASEAN Equity Market May Face Another Weak Summer

Overview

This J.P. Morgan ASEAN equity strategy report, titled 'Another Cruel Summer,' argues that the ASEAN equity market may repeat its seasonal weakness in 2Q-3Q. The report identifies current risks as energy shocks, demand destruction, inflation and exchange rate pressures, monetary tightening, and extreme weather risks, and reaffirms a cautious stance toward ASEAN as a whole, recommending tilting toward markets with stronger external/fiscal buffers and stocks with higher earnings and dividend resilience.

Core views

The report's core judgment is that the ASEAN equity market faces short-term pressure. First, although there are signs of easing in the Middle East conflict, negotiations and normalization of crude oil production will still take time. High energy prices persisting at elevated levels will cause demand destruction—airlines cutting routes and petrochemical plants halting operations due to raw material supply disruptions are examples. Second, rising energy and food prices fuel inflation, prompting ASEAN central banks to gradually exit their loose stances from 2024-25: Singapore's MAS slightly raised the SGD exchange rate policy slope in April, the Philippine central bank raised its policy rate by 25 basis points from 4.25% to 4.5%, and Indonesia's central bank also sent hawkish signals. Limited monetary and fiscal space means governments can only buffer demand by maintaining fuel subsidies, but the sustainability of such support remains questionable. On the demand side, the impact on consumer companies may not immediately show up in financial statements but will gradually emerge over the next 6-12 months as inventory cycles adjust, pricing actions take effect, and government subsidy policies change—especially affecting profit margins. In the financial sector, rising interest rates combined with weakening demand could erode banks' asset quality over the coming quarters, bringing earnings downgrade risks. The report also notes that consensus forecasts still expect ASEAN earnings growth in 2026 to be in the 5-10% range (Indonesia at only 1.3%), and under a pessimistic scenario, there is room for downward revisions in earnings forecasts. Additionally, the report warns that the risk of a 'super El Niño' is rising. If rainfall in South Asia declines and agricultural production is disrupted, coupled with the Middle East conflict driving up fertilizer prices, ASEAN could face a new round of food inflation, with net food-importing countries like the Philippines being hit hardest.

Analysis framework

The report adopts a 'top-down' macro strategy framework: starting from external shocks such as the Middle East geopolitical conflicts and extreme weather events, assessing their impact on energy and food prices and supply chains; then analyzing how these shocks transmit through inflation, exchange rates, and monetary policy to ASEAN economies and corporate earnings; finally, combining seasonal historical patterns, foreign capital flows, and the width of earnings revisions to determine whether the market has fully priced in downside risks and provide regional allocation and stock-picking directions.

Methodology notes

• Industry/sector analysis frameworkSupply-demand framework

  The transmission of energy and food supply shocks to downstream demand and inflation

  The report explains the logic behind the ASEAN equity market's earnings pressure by analyzing how Middle East conflicts and extreme weather events disrupt supply, driving up energy and food prices and suppressing downstream demand in sectors such as aviation, petrochemicals, and consumption.

• Cycle and Economic Sentiment FrameworkInventory cycle (Kitchin)

  The lagged impact of inventory cycles, pricing adjustments, and policy changes on consumer company earnings

  The report points out that the impact on consumer company earnings (especially profit margins) will gradually become evident over the next 6-12 months, as companies go through inventory adjustments, pricing actions, and changes in government subsidy policies.

• Cycle and Economic Sentiment FrameworkEconomic Turning Point Analysis

  Judging market turning points based on seasonal patterns and the width of earnings revisions

  The report observes that the ASEAN equity market exhibits seasonal weakness in 2Q-3Q and, combined with the fact that earnings forecast revisions haven't turned negative yet and consensus expectations remain relatively optimistic, judges that the market still faces downgrade risks.

• Valuation MethodologyDividend Yield Method

  Using earnings resilience and dividend yield as defensive stock-picking criteria

  In a context of market pressure and weak growth momentum, institutions tend to choose stocks that offer stable earnings and high dividend yields to gain relative defensiveness.

• Macroeconomic framework

  Scenario stress tests on monetary and exchange rate policies

  The report constructs baseline and pessimistic scenarios (such as Brent crude staying at $100 per barrel) to assess the combined impact of interest rate hikes, currency depreciation, and weakening demand on corporate earnings and banks' asset quality.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Preferred ASEAN Portfolio (DBS, ST, STE, PBK, MAY, TNB, PMAH, ANTM, ICTSI, BH, MRDIYT, GULF, TRUE, VCB)

  The report lists preferred ASEAN stocks, favoring earnings resilience and dividend yields

Key data

• ASEAN 2026E Consensus Earnings Growth Rate8.8%Expected at 10.1% in 2027E; among them, Indonesia's 2026E is only 1.3%, while Malaysia's 10.3% is the highest
• BSP Policy Interest Rate4.5%Raised by 25 basis points from 4.25% to 4.5%
• Earnings Change Under Pessimistic Scenario in 2026E-5% to -10%Assuming Brent crude stays around $100 per barrel for the rest of 2026
• Rice Price Increase After India Restricts Rice ExportsAbout 30%Combined with the Middle East conflict driving up fertilizer prices, this could push up food inflation in ASEAN
• ASEAN 12-Month Earnings Revision-6.2% (2026E)2026E 1M -2.5%, 3M -3.2%, 6M -4.2%; 2027E 12M at -3.7%

Impact & implications

The report believes that the ASEAN equity market will continue to face dual risks of earnings downgrades and valuation pressure in the short term. The combination of energy shocks, inflation, and monetary tightening will weaken corporate earnings, especially in consumer, banking, and cyclical sectors; meanwhile, limited fiscal space and unsustainable government subsidies could further suppress domestic demand. Relatively speaking, markets with stronger external/fiscal buffers (such as Singapore and Malaysia) and stocks with robust earnings resilience and high dividend yields are more defensive. If the Middle East situation and extreme weather risks ease, there is room for earnings revisions—but given that consensus hasn't fully priced in downside risks yet, the report advises investors to remain cautious and pay attention to subsequent policy and earnings data changes.

Risks

• Prolonged Middle East conflict leading to shortages and high prices of energy and commodities
• Energy price shocks triggering demand destruction, dragging down industries such as aviation, petrochemicals, and consumption
• ASEAN central banks shifting toward interest rate hikes due to inflation and exchange rate pressures, dampening economic and retail sentiment
• Rising interest rates and weakening demand eroding banks' asset quality and triggering earnings downgrades
• Limited fiscal buffers, making it difficult for governments to sustain fuel subsidies
• A 'super El Niño' causing reduced agricultural output and food inflation, particularly hitting net food-importing countries like the Philippines
• Continuous outflows of foreign capital and lack of growth drivers putting pressure on the market

What to watch

• Progress of Middle East conflict negotiations and pace of oil supply normalization
• Trends in interest rate and exchange rate policies of ASEAN central banks
• Trend of corporate earnings revision and adjustment of consensus forecasts
• Development of El Niño, rainfall conditions, and rice/fertilizer prices
• Changes in fiscal space and fuel/food subsidy policies of various countries