SINGAPORE: After being sidelined by investors for much of this year, some smaller equity markets are suddenly winning favour.

The trend is particularly evident in Asia, where Thailand, Singapore and New Zealand rank as the top performers in September.

Their benchmarks have risen at least 3% each so far, even as MSCI Inc’s gauge of global stocks has fallen about 1% following a four-month winning streak.

Investor focus seems to be shifting as the world’s biggest equity markets such as the United States, Japan and India take a breather, and China’s slump deepens.

For many of the smaller Asian markets, a limited exposure to the artificial intelligence (AI) theme means their valuations aren’t expensive, making them attractive just as the US Federal Reserve’s (Fed) pivot helps boost their currencies and allows some central banks to embark on rate cuts.

“Some investors are seeking diversification away from larger, more volatile markets, leading to increased capital inflows into smaller ones,” said Manish Bhargava, chief executive officer at Straits Investment Management in Singapore. “The desire is maybe to mitigate risks associated with larger economies and to tap into the growth potential of smaller markets.”

The outperformance of under-appreciated markets in an otherwise challenging September isn’t just an Asia phenomenon.

Equity indexes in Argentina, Lebanon and Zambia also rank among the world’s top performers this month in a list of more than 90 global gauges tracked by Bloomberg.

In Asia, foreigners are on course to mark a fifth consecutive week of inflows into South-East Asian stocks.

Meanwhile, volatility has been picking up in the United States as traders debate the pace of the Fed’s easing, the outcome of the US election and whether the AI boom has run its course.

In Japan, the yen’s strength has halted a record-breaking stock rally as the Bank of Japan prepares for another rate hike. India is also grappling with valuation concerns after world-beating gains.

The tech-heavy markets of South Korea and Taiwan have both witnessed foreign outflows from stocks this month amid uncertainty over the outlook for AI-linked shares.Some of the smaller economies meanwhile are enjoying local tailwinds, such as Thailand’s return to political stability and Singapore’s focus on real estate investment trusts, a sector that benefits from lower global rates.

And valuations are clearly in their favour, even after the latest gains.

Benchmarks for Thailand, Singapore and the Philippines are trading at less than 15 times their 12-month forward earnings estimates, and all below their three-year average ratios.

 - Bloomberg