A broker stretches during a trading session at the Indonesia Stock Exchange in Jakarta
Indonesia's economy expanded at a lower than expected rate of 5.8 percent in the third quarter, government data showed on Friday, but analysts said the slowdown is due to one-off factors and not a cause for concern. REUTERS/Supri Supri

Stock markets in Indonesia, the Philippines and Thailand, until recently the darling of foreign investors, have taken a hit as high valuations and fears about the future of the U.S. Federal Reserve's bond-buying program prompt an exit from these markets, Bloomberg reported.

The three Southeast Asian nations led a four-year rally in global stocks, helped by strong domestic economies and the inflow of foreign funds. International investors have poured nearly $25 billion in to these markets since the first round of quantitative easing was announced by the U.S. Fed on Nov. 25, 2008.

Since then, each of the three markets recorded at least a 300 percent gain in the last four-and-half years. However, all three indices have lost nearly 4 percent in the last two weeks on renewed fears that the Fed might start to scale down its asset-purchase program sooner rather than later.

“It’s easier to take money off the table in Southeast Asia,” Vincent Fernando, the head of ASEAN research at Religare in Singapore, told Bloomberg in a phone interview yesterday. “It’s too soon to say there’s a big buying opportunity.” ASEAN refers to the Association of Southeast Asian Nations.

The Jakarta Composite Index, or JCI, hit an all-time high of 5,214.98 on May 20, buoyed by an inflow of foreign funds. However, the index has lost 3.6 percent since May 22 as many foreign investors pulled out from the market following Federal Reserve Chairman Ben Bernanke's announcement.

“What we are worried about is the trend of foreign funds net sales increase. To date, the main driver of the local market is foreign investors. Local investors are trying to hold on. However, we don’t know how long they will be able stay. Foreign investors may consider this the right time to sell their Indonesian stocks and to take profits, as most of their shares have given them high returns,” Edwin Sebayang, head of research at MNC Securities, told the Jakarta Post.

Bernanke, in his testimony to Congress on May 22, said the central bank could scale down its asset-purchase program in the next “few meetings,” and any change would be made after considering the inflation and unemployment data for the coming month.

However, the FOMC minutes for the May 1 meeting, released later on the same day, showed that more members favored the tapering of bond-buying program as early as June, leading foreign investors to pull money out of these countries.

Data compiled by Bloomberg showed that international investors have withdrawn a combined $1.6 billion following the announcement -- the most since August 2010.

The Philippine stock market is the worst performer among the three, with the Philippine Stock Exchange Index, or PCOMP, plunging more than 9 percent in the last two weeks, as foreign investors started offloading their holdings.

International investments accounted for nearly 35 percent of daily trading last week on PCOMP, down from an average of 50 percent recorded during the January- May period.

However, fears about the Fed's move are not the only reason behind the losses in these three markets as high valuations also have driven foreign investors out of these three countries and into cheaper markets such as South Korea and Taiwan.

According to Bloomberg, PCOMP has a price to 12-month estimated earnings multiple of 19 times and JCI has a multiple of 15 times while Thailand’s SET Index traded at 13 times, far higher compared to 9 for South Korea’s Kospi index and 7 for the Hang Seng.

“Indonesia, Thailand and the Philippines are the most vulnerable,” Markus Rosgen, Citigroup’s chief strategist for Asia, wrote in an e-mail to Bloomberg yesterday. “The Philippines in particular had become very expensive versus the rest of the region.”

On the other hand, cheaper markets such as South Korea and Taiwan could benefit from a recovery in the U.S., according to Citigroup, the Bloomberg report noted.