MANILA (Nov 27): Equities in the region should have better times in 2019 as expectations of a weaker dollar will help counter the impact of further U.S. Fed tightening and continued trade tension, according to Sean Gardiner and Aarti Shah, analysts at Morgan Stanley.

* Investors should prefer Southeast Asia’s equities markets as follows: Indonesia, Singapore, Thailand, Malaysia and Philippines 

* Malaysia cut to underweight with 3% implied downside as market tends to underperform when in rising emerging market; falling oil prices provide headwind with budget set at $70/bbl while earnings face further risk as fiscal consolidation bites into infra projects

* Indonesia is most preferred market with 12% implied upside as a weaker dollar should boost P/E as risk-free rates fall, improve returns for dollar investors and lead to more dovish central bank; correction in oil prices to provide near-term relief for current account

** To picks in Indonesia: Astra International, Bank Central Asia, Bank Mandiri Persero, Telekom 

* Stay underweight Philippines even as inflation peaks as 300 bps increase in domestic funding costs in past 12 months, slowing GDP growth to weigh on earnings and equity valuations in 2019

** Main underweight sector banks; implied downside for Philippines: -2%

* Exports and elections to revive domestic consumption in Thailand, which has 5% implied upside; better wage growth to support cyclical rebound in consumption in 1H

** Overweight energy, staples and discretionary; banks equal-weight with preference for TMB Bank and Bangkok Bank

* Singapore kept overweight even with cut in earnings estimates due to valuations, which at 11.5x 12-month forward P/E, have only been this cheap five times in last 30 years 

** Earnings growth has slowed from low teens to mid-single digit due to stronger 2018 and will stabilize at 6%-7% 

** Overweight banks, industrials; underweight telcos; real estate cheap but lack catalyst

* NOTE: MSCI Asean Index has declined 12% this year as equities markets in the region tumbled on rising inflation, a stronger dollar and trade tension between U.S. and China; gauge poised for first annual loss in three years