What to expect from Asian Equities in 2024?
We explore the impact of global macroeconomic trends on Asian markets, such as the performance of sectors like technology and semiconductors, the impact of US monetary policy, and the potential of well-managed businesses amidst economic headwinds. We also delve into where we see the most interesting potential opportunities in Hong Kong, Mainland China, Korea, Taiwan, India and ASEAN economies.
Authors
Outlook for Asian Equities in 2024?
Valuations for Asian regional equities are close to longer-term average levels. There remains a significant spread in multiples between stocks and sectors. Markets such as India and Taiwan that performed strongly in the last year are trading at marked premiums to their historical averages and expectations are elevated, while Hong Kong and Mainland China indices are still sitting close to all-time low multiples. As such, we remain selective in our exposures and continue to take a bottom up approach in building our portfolios.
Gains in Asian equities generally require a more stable global macroeconomic backdrop, a less hawkish US Fed, reduced volatility in US-China relations and a more positive Chinese cyclical outlook. These factors are crucial in attracting flows back into the Asia region from foreign investors.
Visibility remains limited on many of these fronts, most importantly the China policy backdrop through 2024, but on balance we expect these four factors to be more supportive for Asian equities over the next 12-18 months.
Chart: Asia ex Japan markets are still reasonably valued
For illustrative purposes only and does not constitute to any recommendations to invest. Past performance is not a guide to future performance and may not be repeated.
Mainland China: A broader economy (outside of property development) that may be sluggish, but is not in a downward spiral.
Over the last year, China markets have struggled in the face of disappointing macroeconomic data and a lackluster policy response. This, in turn, has undermined investor confidence, not only in the near-term cyclical outlook, but also in longer-term growth forecasts. Geopolitical tensions between China and the US also remain an overhang.
Despite the weaker headline macroeconomic data and property market challenges, we have felt for some time that after such a sharp de-rating of the Hong Kong and Mainland China equities, markets were overly negative on the outlook. The operating performance from the local equities we own, as reflected in recent results, has been more encouraging than the macro headlines would have one believe. The strongest operating performance has been in the travel and leisure-related sectors – hotels, gaming, restaurants, luggage and beverage companies. Here, the rebound in activity and earnings in Mainland China has broadly met, or in some cases exceeded, initial expectations in 2023. E-commerce and online advertising sales have also seen a modest rebound, helping the key large-cap online players to deliver improved bottom-line growth, aided by greater cost discipline and, in some cases, aggressive share buybacks. All of this points to a broader economy, outside of the property development industry, that may be sluggish, but is not in a downward spiral.
Chart: Chinese stocks have de-rated despite improving fundamentals
For illustrative purposes only and does not constitute to any recommendations to invest. Past performance is not a guide to future performance and may not be repeated.
While we share many investors’ concerns about the structural headwinds China faces, given the extremes of negative sentiment there is room for the authorities to surprise positively with better-coordinated policy support going forward. This has been evident in April and May, when markets were encouraged by talk of a more concerted Central Government plan to deal with excess supply in the residential property market. For the first time the Central Government has allocated funding for local Government entities to buy excess housing inventory from the market as a way to both reduce the supply overhang and channel funds to the developers. The sums involved so far are fairly modest given the scale of the problem, and the mechanism for executing the buyback of inventory is fairly opaque, so it feels unlikely that these steps alone will be enough to reverse the tide and trigger a broader upswing in buyer confidence. However, once the authorities have started down this path to address the supply issue in a more concerted manner, it seems likely that further support could be forthcoming if conditions don’t improve. As such we take some encouragement that stabilising the property market and broader consumer confidence has likely moved up the Government’s priority list and this could help put a firmer support under valuations in the broader China markets.
With the bounce back in the local markets recently, we are encouraged that the indiscriminate capital outflows may be coming to an end and the market is at last starting to differentiate more clearly between stronger and weaker businesses, rewarding those that can continue to deliver growth and dividends for shareholders.
Chart: Underweight positions in China gradually starting to reverse
For illustrative purposes only and does not constitute to any recommendations to invest. Past performance is not a guide to future performance and may not be repeated.
For Hong Kong and Mainland China equities, our view remains that better-managed businesses with stronger franchises can still deliver growth, even against a softer economic backdrop in China. There have also been signs of more ‘self-help’ among Chinese corporates recently, with a notable increase in dividend payouts and buyback activity, which is encouraging and may offer more downside support for stocks over time. Even after the recent rebound, share prices in many sectors in Hong Kong and Mainland China are not far off levels seen in the depths of the Covid restrictions when the earnings outlook was far more uncertain for most companies. Given this mismatch in share-price performance against operating fundamentals, and the still very low expectations for the Hong Kong and China markets, we continue to see attractive opportunities in selective areas on a bottom-up basis.
Chart: Chinese companies are starting to buy back shares
For illustrative purposes only and does not constitute to any recommendations to invest. Past performance is not a guide to future performance and may not be repeated.
Korea and Taiwan: Technology hardware such as semiconductors are key drivers of these markets as the underlying structural forces remain strong.
Alongside the excitement around AI, technology hardware names have continued to do well this year thus far as investors have positioned for a broader improvement in demand and pricing for semiconductors and IT products in the coming quarters. At the moment, end-market demand still remains fairly soft and inventories are still above average levels in some parts of the supply chain. However, recent comments from companies in the industry point to a stabilisation in the Chinese smartphone market and optimism about a modest rebound in personal computer and mainstream server demand through 2024.
As inventories normalise, a more regular ordering pattern and improved pricing backdrop should allow for renewed top-line growth and better margins. Consumer electronics companies are starting to discuss a new generation of AI-enabled PCs and smartphones that may also help to encourage shorter replacement cycles and push up selling prices over time. As a result, despite recent volatility, we continue to think that the underlying structural drivers for semiconductors will remain strong in the coming years and valuations for large-cap industry leaders within the sector remain attractive. At the same time, however, we do hold concerns that the recent excitement over the revenue potential for some companies in the AI supply chain may be excessive. This reflects heavy retail investor trading volumes in Taiwan, in particular, that have pushed valuations to elevated levels.
Chart: TSMC is the key AI play in Asia
For illustrative purposes only and does not constitute to any recommendations to invest. Past performance is not a guide to future performance and may not be repeated.
In addition to gains in semiconductor memory stocks, Korean equities have found support this year from hopes that a new government-led plan to improve local corporate governance – the “Corporate Value-Up” plan - could trigger a re-rating for the market. A similar initiative in Japan is credited with driving more market friendly behaviour by corporates in recent quarters, and helping deliver strong equity-market gains. The upside potential in Korea could be significant, given that historically the market has suffered from a material corporate governance discount against international peers. However, making broad generalisations about the potential ‘winners’ at this stage is difficult. So far, we are yet to see detailed proposals from the government and regulators, and the response from the key industrial ‘chaebol’ groups is unlikely to be uniform, given their different ownership structures and internal priorities. Bottom-up, stock-by-stock assessments will be key to picking the real beneficiaries.
Chart: Korean corporates have inefficient balance sheets
For illustrative purposes only and does not constitute to any recommendations to invest. Past performance is not a guide to future performance and may not be repeated.
India: Strong growth in private sector banks, healthcare and consumer related sectors
Indian equities have also performed very strongly in recent months. Sentiment towards the local economy and its longer-term potential remains very positive at a time when China’s fortunes are increasingly being questioned by investors. A healthy domestic growth outlook, geopolitical tailwinds, the scope to increase market share in global manufacturing at the expense of China and steady domestic fund inflows into local equity markets are all tailwinds factors.
Valuations however, remain elevated in many sectors, so this positive outlook is well-discounted today – especially for small and midsize stocks that have been the focus of domestic buying and where expansion in valuation multiples is most marked.
At the same time, the recent election results may change the narrative on India somewhat for overseas investors, where the elements of political stability, a business-friendly government and strong execution of policy had been key attractions of India in recent years (and a contrast to China). From a bottom up perspective, we continue to see strong longer-term fundamentals in areas such as private sector banks, healthcare and select consumer related stocks, which remain core positions in our regional Asian portfolios.
Chart: Long term runway for growth for Indian private banks
For illustrative use only, not a recommendation to invest. Past performance is not a guide to future performance and may not be repeated.
ASEAN economies have recovered steadily following an earlier end to Covid restrictions, and should continue to see benefits from the normalisation of travel and tourism going forward. However, having performed relatively strongly over the last year, the broader local equity markets in ASEAN could be offering less obvious value, and the performance of these markets remains heavily influenced by the large-cap bank stocks that tend to dominate indices. Rising interest rates have to date been a material benefit to banks in most countries, lifting margins and returns on equity, and helping underpin higher dividend payouts. That said, the momentum from these upgrades will likely fade as the global interest-rate cycle peaks in the coming months, which will likely take some wind out of the sector’s sails.
Summary
Overall, we remain upbeat on the potential for a continued gradual recovery in activity in key stocks and sectors in Mainland China and a rebound in technology sector fundamentals moving further into 2024. This would underpin our preferred Asian equities over the medium term. In the meantime, we remain selective in our exposure given the continued uneven nature of the recovery in the region. We have been careful to ensure that our portfolio companies have strong balance sheets to weather any near term volatility, and continue to look for companies offering greater earnings visibility over the medium term horizon. We also remain disciplined around valuations. In the short term, this may be somewhat painful as we avoid areas of the market which we believe look ‘frothy’ (i.e. the AI space in Taiwan, small-mid cap companies in India) but should help to ensure we deliver more consistent performance over the cycle.
The US dollar remains a key risk: Expectations for US monetary policy continue to ebb and flow with incoming data, and April saw a further reduction in the number of rate cuts priced into markets. This reflected stronger-than-expected economic growth and inflation data. A stronger US dollar and a higher for longer US interest rate backdrop does present some headwinds for the region, especially for some ASEAN markets like Indonesia and the Philippines where capital flows can be more volatile based on these macro trends.
Chart: US monetary policy remains a key driver of Asian markets
For illustrative purposes only and does not constitute to any recommendations to invest. Past performance is not a guide to future performance and may not be repeated.
Subscreva o nosso conteúdo
Visite o nosso centro de preferências e escolha que informação deseja receber por parte da Schroders.
Authors
Topics