ASEAN equity markets have navigated a challenging 1H26, shaped by the Middle East energy shock, renewed US dollar strength following the Fed's hawkish rhetoric, and heightened geopolitical uncertainty. However, the macroeconomic backdrop is becoming increasingly supportive as oil prices retreat, inflation moderates and regional policy uncertainty declines, setting the stage for improving investor sentiment in 2H26.

The escalation of the US-Israel conflict with Iran disrupted ASEAN's economic outlook by driving oil, LNG, and freight costs higher. As most Southeast Asian economies are net energy importers, the surge in commodity prices widened current account deficits, raised inflation, and increased fiscal pressures through higher fuel subsidies. Alongside expectations of tighter US monetary policy, these developments weighed on regional currencies and prompted foreign investors to adopt a more cautious stance towards ASEAN assets.

Since then, conditions have improved materially. The temporary ceasefire and reopening of the Strait of Hormuz have removed much of the geopolitical risk premium embedded in crude oil prices, with Brent crude returning to pre-conflict levels. The decline in energy prices is easing inflationary pressures, improving external balances, in turn supporting a recovery in consumer purchasing power and corporate profitability across the region.

Although the ceasefire remains fragile and geopolitical risks persist, our base case is that oil supply disruptions will remain contained. Barring a material escalation that threatens energy infrastructure or shipping through the Strait of Hormuz, energy prices are likely to remain well below their conflict-driven peaks.

Importantly, most ASEAN central banks have largely completed their monetary tightening cycles. With inflation now moderating and economic growth stabilising, policymakers are increasingly focused on supporting domestic demand rather than containing price pressures. This policy stability should allow regional interest rates to remain broadly accommodative, providing a more supportive backdrop for earnings growth and equity valuations.

Foreign selling appears technical rather than conviction-driven. A notable feature of the 1H26 KOSPI rally is that foreign investors remained persistent net sellers throughout the upcycle. However, this selling largely reflects mechanical and portfolio-rebalancing factors rather than a fundamentally bearish view on Korea equities. As Korea equities outperformed from 2H25 onwards and their weight in global portfolios rose sharply, foreign investors trimmed positions to comply with allocation limits and risk frameworks. That said, ownership levels remain relatively elevated despite YTD outflows, leaving some scope for further selling pressure.

Regional currencies, which weakened during the period of elevated oil prices and US dollar strength, are also expected to stabilise. Lower energy import costs, improving current account dynamics, and proactive foreign exchange management by several central banks should reduce depreciation pressures. Currency stability has historically been an important catalyst for foreign portfolio inflows into ASEAN, particularly as investors gain greater confidence that external vulnerabilities are receding.

At the same time, the structural growth story for ASEAN continues to strengthen. Global AI capital expenditure remains robust, supporting electronics exports, semiconductor manufacturing, industrial automation, and data centre investments across the region. Rather than competing directly in AI model development, ASEAN economies are increasingly positioned as critical manufacturing and infrastructure partners within the global AI ecosystem.

Country Views

Singapore continues to be ASEAN's highest-quality defensive market. Stable inflation, resilient GDP growth, and strong demand for advanced manufacturing, semiconductor production, and wholesale trade services position the market to benefit directly from the global AI investment cycle while maintaining macroeconomic stability. We upgrade our GDP growth forecast for this year to 4.3%.

Increased emphasis by regulatory bodies on enhancing the breadth and depth of Singapore's equity markets has helped the STI hit repeated all-time highs in 2026. Although it is trading at above 1 SD forward PE valuations, we believe there is still room for re-rating given improved market liquidity and growth prospects driven by regulatory reforms and global structural trends. Deployments under the Equity Market Development Programme (EQDP) and the enhanced Grant for Equity Market Singapore (GEMS) scheme underscore a renewed focus on broadening the market and SMC development. In addition, Singapore’s valuation discount relative to Asia ex-Japan markets could also narrow further.

The Singapore equity market offers the highest dividend yield among the region with an average yield of c.4%, mainly derived from S-REITs and banks. These two sectors continue to offer a compelling blend of real asset exposure and attractive income generation that outshines Singapore government bond yields by 3% and 2% respectively. S-REITs currently trade at an appealing 0.9x P/B with a solid 5.5% dividend yield.

Indonesia’s long-term structural story remains intact through downstream industrialisation and critical mineral development, although higher US interest rates continue to create intermittent capital flow volatility. As energy prices normalise and external balances improve, investor focus is likely to return to Indonesia's favourable domestic growth outlook.

We believe recession risk is overplayed in Indonesia. The JCI's near-term direction remains largely driven by market sentiment and the IDR trend. Investors perceive a lack of credible defensive measures from Bank Indonesia, with foreign exchange reserves declining to a two-year low of USD144bn. While the current macroeconomic environment remains uncertain, we believe the worst-case scenario has largely been priced in, with the market factoring in the risk of Indonesia being downgraded to frontier market status, losing its investment-grade rating, and the IDR weakening to 18,000 against the USD by year end. JCI is now trading at a -2 SD valuation level, below even the pandemic trough. We believe the market has already priced in the loss of Indonesia's investment-grade status following the new export scheme announcement, a potential downgrade to frontier-market status by the index provider, and a prolonged period of IDR weakness around 18,000/USD. Recession risks also appear to be reflected in current valuations.

Using BBCA as a proxy—given its status as Indonesia's largest bank, significant foreign ownership, and substantial contribution to YTD foreign outflows—the stock is currently trading at FY26 P/B of 2.1x as of 8 Jun, a level last seen during the 2008 Global Financial Crisis, before rebounding back to 2.7x recently. Current valuations imply an economic downturn more severe than the pandemic, which we view as unlikely at this stage.

Thailand’s recovery remains more dependent on domestic policy execution. Progress on fiscal stimulus, political stability, and trade diversification through new free trade agreements will determine the pace of earnings recovery. Nevertheless, lower oil prices provide meaningful relief for one of ASEAN's largest energy importers.

We maintain our end-2026 SET Index target at 1,650. Bank of Thailand raises their 2026 GDP growth forecast to 2.3% y/y, reflecting stronger export and investment momentum and resilience to Middle East-related disruptions. Near-term volatility may persist due to Fed angst and the US-Iran deal still weighing on regional risk appetite, but we see these pockets of weakness as entry points into names tied to tourism rebound, healthcare sector re-rating, the ongoing infrastructure build-out, and renewed appetite for AI- and telecom-linked names.

Malaysia remains one of the region's preferred equity markets, supported by resilient electronics exports, expanding semiconductor investment, and continued inflows of foreign direct investment. Fiscal consolidation remains on track despite temporary subsidy-related pressures, reinforcing long-term policy credibility.

Malaysia’s P/B valuation discount appears to reflect elevated cash holdings and inefficient capital allocation. Policy momentum is building, led by the Ministry of Finance’s GEAR-uP initiative launched in Aug 2024 and the MY Value Up Programme in 2Q26. GEAR-uP offers the stronger catalyst, in our view, with Malaysia’s six core government-linked investment companies (GLICs) targeting MYR100bn of market-cap uplift of their investee companies over five years and at least 7.5% p.a. shareholder returns. By contrast, MY Value Up remains voluntary and disclosure-led, with mandatory adoption only being considered from end-2027, limiting its near-term impact. We believe the next phase of reform must shift from signalling intent to delivering measurable outcomes, as seen in Japan, including clearer value creation targets, stronger capital return discipline, and effective balance sheet management, to narrow Malaysia’s valuation gap.

The Philippines continues to benefit from resilient domestic consumption, infrastructure investment, and stable remittance inflows. The prolonged closure of the Strait of Hormuz, and higher-for-longer oil prices matter most for Philippine equities, as the country remains one of Asia’s more energy-sensitive markets and stands to benefit as the energy shock unwinds.

Higher oil prices weighed on the market through several reinforcing pressures: accelerating inflation, peso weakness, policy uncertainty, margin compression, and valuation de-rating. As the energy shock starts to regress, these pressures should gradually ease, creating room for a more constructive view on Philippine equities. Our focus is on stock selection of companies that can absorb near term macro damage while still retaining enough beta to participate in the relief trade.

Vietnam remains the region's strongest long-term structural growth market, supported by continued manufacturing relocation, export diversification, and increasing integration into global technology supply chains. Economic growth has been a regional standout, although falling short of the government’s ambitious target of above 10% this year. Real GDP growth accelerated to 8.4% y/y in 2Q26, following an upwardly revised 7.9% y/y in 1Q26, as the economy weathered disruptions in the Strait of Hormuz. Export-oriented manufacturing underpinned by electronics momentum remained the primary growth driver in 2Q26, complemented by robust FDI and resilient domestic demand.

We expect these growth drivers to sustain over the coming months and therefore raise our 2026 GDP growth forecast to 8.0% from 6.5%. A managed de-escalation of US-Iran tensions and the resumption of shipping flows through the Strait reduces the risks of escalating input costs, severe supply chain disruptions, and a significant weakening in external demand. As upside inflation risks recede, the SBV can afford to keep monetary policy supportive to sustain growth, while remaining vigilant over currency stability.

A sanguine outlook, together with entry into the international benchmark index, should set the stage for stronger performance in 2H26. Vietnam was promoted to Secondary Emerging Market status (EM) by FTSE. The reclassification will be implemented in four tranches during the Sep 2026 (10%), Mar 2027 (20%), Jun 2027 (35%), and Sep 2027 (35%) review.

There are 23 companies eligible for the FTSE Global All Cap Index, according to the FTSE’s indicative list. The index provider previously estimated that its reclassification may draw inflows of USD6bn into Vietnam, which is 1.8% of the Ho Chi Min Index’s current market cap.

Investment conclusion. Overall, the investment backdrop for ASEAN equities is improving. The combination of moderating inflation, lower oil prices, stabilising currencies, and policy rates that have likely peaked should gradually restore foreign investor confidence. As macroeconomic risks subside, capital flows are likely to return to a region where equity valuations remain attractive relative to historical averages and other major Asian markets. Together with resilient earnings supported by AI-related investment and improving domestic demand, ASEAN offers an increasingly compelling opportunity for investors seeking both cyclical recovery and long-term structural growth.

Figure 1: Cyclical catch-up for laggards; Secular winners remain intact

Source: LSEG, DBS
Note: Data as at 9 Jul 2026


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