01/07/2011 (Channel News Asia) - Stock markets in Malaysia and Indonesia have outpaced their Southeast Asian counterparts for the first half trading of this year.

Backed by a strong list of commodities firms, the two exchanges saw growth of between four and more than five per cent since the start of the year.

Analysts said these two markets will remain firm in the second half.

But they warn that headwinds like inflation merit caution.

Coal produced in Indonesia will likely be in hot demand as global markets brace for higher energy prices and inflation.

Malaysia, which exports much of its palm oil production, can also expect a similar take-up as resources in overseas markets remain scarce.

Its commodity plays like these that have lifted the Malaysian and Indonesian stock markets to greater heights in the first six months of 2011.

Among other Southeast Asian economies, Singapore gave up more than two per cent this year, while the rest stayed firmly in the green.

UBS Wealth Management chief investment strategist Kelvin Tay said: "In terms of Indonesia, the market has actually been very resilient.

The Indonesian rupiah has been one of the best performing currencies. On top of that, the market has also benefited from the turbulence on oil prices in the first half of this year".

But while Indonesia and Malaysia will remain as defensive markets, analysts see some warning signs for the second half.

"The valuations for Southeast Asian markets particularly for Indonesia and Malaysia are also not attractive as they were before, largely due to their outperformance this far," Mr Tay said.

"Therefore, if you're positioning for the second half this year, we would probably prefer a bias towards North Asian economies... (such as) China, Korea and Taiwan".

Analysts are betting on the commodity and technology sectors for the second half.

In particular, they are bullish on financials and tourism for Singapore, but are cautious on Thailand.

HSBC Global Research asian economist Wellian Wiranto said: "Thailand continues to be beset by political uncertainties.

"Having said that, however... in 2010, we saw the growth registering close to eight per cent of growth despite what happens in the streets of Bangkok in April and May.

"Overall, it continues to be beset by political overhang so they might miss out somewhat in the relative terms again.

"The second half will be will be a story of pick up... provided that the global picture remains fairly benign.

"Overall, we don't see signs of double dip at all, so (it's) still a good picture for the second half of this year".

While Southeast Asian markets are expected to pick up in the second half of the year in line with a brighter global economic outlook, concerns such as inflation remain.

While headline inflation has begun to ease, core inflation for quite a few economies continue to pick up.