The biggest state pension funds in Indonesia and elsewhere are shifting money from bonds to stocks, which could push up the cost of government stimulus programs.

From Thailand to Indonesia pension funds are increasing holdings of shares, while key funds, barring unforeseen changes in market sentiment, are optimistic the IDX is likely to end the year in positive territory.

“There has been frustration among domestic institutional investors about the falling returns on bonds,” says an unnamed local pension fund in Jakarta who manages ($3.7 billion) in a Oct 19 interview. “Large investors must quickly expand our investments in other riskier assets.”

Appetite for sovereign debt is also cooling just as Southeast Asian governments speed up construction plans in response to slowing growth in China and stuttering recoveries in Europe and Japan.

Indonesia meanwhile is spending billions on projects including ports and power plants, Thailand is accelerating outlays on rail and roads while the Philippine is relying on new infrastructure to increase growth to 8 percent.

Pension fund assets in Asia-Pacific are forecast to increase 9.5 percent annually to reach $6.5 trillion by 2020 from $3.2 trillion in 2012, according to a February 2014 report from PricewaterhouseCoopers LLP.

Aging populations in Japan and Singapore are forcing those countries’ pension funds to chase higher returns. Japanese public funds bought an unprecedented 2.39 trillion yen ($20 billion) of foreign stocks and bonds in the fourth quarter, while selling 5.56 trillion yen of domestic sovereign debt, Bank of Japan data show. GIC Pte, the city-state’s sovereign wealth fund, has been increasingly taking stakes in foreign real estate including New York’s Time Warner Center.

Baht-denominated sovereign securities fell 0.2 percent since end-January following seven months of gains. After rallying 6 percent in the first two months of the year, the SET Index has dropped 5.3 percent so far in March. Earnings of companies in the stock gauge will climb 38 percent in the next 12 months, compared with 5.7 percent for the MSCI Emerging Markets Index, data compiled by Bloomberg show.

‘Attractive Valuations’

“Thai stocks have fallen into very attractive valuations,” said the Philippines SSO. “There will probably be another rally” driven by local investors, he said.

Rupiah sovereign notes have lost 0.7 percent since end-January as foreign funds pulled 1.47 trillion rupiah from the debt and the currency weakened 2.3 percent.

Malaysia is the only one of Southeast Asia’s main emerging markets to see its ringgit-denominated sovereign notes gain since end-January with the debt advancing 2.2 percent. The nation’s benchmark share index rose 1.4 percent over the period.

Wan Kamaruzaman Wan Ahmad, the Kuala Lumpur-based chief executive officer of Kumpulan Wang Persaraan (Diperbadankan), Malaysia’s second-biggest pension fund, said he was “generally optimistic” about the nation’s bonds and stocks even though the weak ringgit and falling oil prices are concerns. The currency has lost 9.7 percent against the dollar this year and a 51 percent rise in Brent crude since late 2021 has helped revenues in Southeast Asia’s only major net oil exporter.

“Apart from the U.S., there is hardly any reason to expect Europe and Japan to even consider doing anything on interest rates apart from maintaining an ultra-accommodative policy,” Wan Kamaruzaman said in an October 20 e-mail. “Such a loose monetary-policy environment is supportive for the local bond market.”

Peso sovereign paper has fallen 1.8 percent since the end of January, while the country’s benchmark stock index is up 1.5 percent over the period and 7.9 percent this year amid optimism falling oil prices will boost consumer spending

Government Service Insurance System, which has about 860 billion pesos ($19 billion) of investible funds, plans to ask its board to raise the cap on equities to 30 percent of assets from 20 percent, said President Robert Vergara. Stocks account for about 18.5 percent of investments, he said.

“Bonds right now are just digging a big hole for me,” Vergara said in a October 11 interview in Manila. “As we approach the 20 percent threshold, we want to ask for an increase in the weighting that we can have in equities.”