Asian investors: Look close to home for opportunities in equities

Where should Asia-based equity investors look to deploy capital this year? As Asia reaps the rewards of conservative fiscal and monetary policies and benefits from trends such as offshoring, “close to home,” might be the answer. Asian equity valuations may also compare favorably with those in the U.S. and other developed markets. So, tilting portfolios towards Asian markets may allow investors to focus on the best opportunities globally, capitalize on future growth and diversify risk exposure.

The centre of global economic gravity continues to move towards Asia. In 2024, for example, the region will account for around 60% of global GDP growth, according to the Economist Intelligence Unit.¹ That reflects a strong performance compared with the rest of the world as Asia benefits from the transformation of intraregional trade and investment.²

Asian financial markets are also experiencing a sea change as the region’s economic weight grows. Where movements in U.S. equities once roiled regional markets, developments in Asia are now increasingly influential. All this means that Asia-based investors may often find the more compelling opportunities within the Asia-Pacific area, rather than in the Western developed markets.

Asian valuations compare favorably

That is likely to be true in 2024, given that valuations in Asia also look much more relatively attractive than elsewhere: Asia-Pacific (ex-Japan) equities trade at 12x 2024 earnings, and EPS growth is expected to be 14%, according to our estimates. By comparison, U.S. equities trade at 21x earnings, while the consensus forecast for U.S. EPS growth stands at 11%.

Moreover, the region’s prospects are broadly positive. The fiscal positions of many Asian countries compare positively with their Western counterparts. Asian governments have learned the lesson of past episodes, such as the Asian financial crisis, and have subsequently adopted more conservative approaches to fiscal policy.

With geopolitical uncertainty likely to be an ongoing risk to equity markets, diversified sources of energy are another important differentiator for Asian economies. Conflicts in the Middle East and Ukraine have pressured energy prices, significantly impacting European economies. However, Asian economies, in general, have been less affected. Inflation trends in Asia have generally been less sticky than the U.S. and has been broadly moving lower.

Meanwhile, investment is rising, the upskilling of labour is taking place, and economies such as India and Indonesia are benefitting from significant infrastructure spending. Domestic consumption is also expanding. In 2024, more than half the Asian population will be middle class or above.² Indeed, Asians now account for 50% of the global middle class, while the OECD countries’ share has fallen to 40%. The days when Americans were described as the consumers of last resort are well and truly over. Now it is Asian consumer spending that increasingly drives global growth.

Offshoring bonus

The rise of “China plus one” supply-chain configurations, as global manufacturers expand production in India and Southeast Asia, is another key driver of growth. Moreover, it’s not just Western manufacturers that are moving production out of China. Chinese businesses are also very active and businesses across the region are gaining from the “China plus one” trend. For instance, automaker, BYD, is building a factory in Thailand and is considering entering Indonesia. Meanwhile, Chinese battery makers have entered into joint ventures in Indonesia to tap the country’s nickel resources. The electronics sector in Vietnam is another key beneficiary, along with renewables and textiles.

The offshoring trend may increase foreign investment inflows and bring the associated benefits of technology transfer. It may increase the host countries manufacturing capabilities and boost infrastructure investment (given the need for greater power generation, for example), as well as supporting employment and exports.

Targeting areas of potential outperformance

There are also compelling opportunities in other sectors. Indonesian banks, for example, may benefit from rising infrastructure spending, increasing consumer affluence and high returns on equity, while incumbent banks enjoy an enduring competitive advantage in their ability to gather deposits.

Another opportunity lies in South Korea, where tax laws, specifically inheritance and dividend taxes, have historically encouraged corporates to adopt less-than-optimal corporate governance procedures. In response, the South Korean government has announced a “Corporate Value-up Program,” aimed at improving the valuations of companies that trade at a lower multiple than similar companies in other countries. The program is providing a framework (and incentives to shareholders) for companies that increase value.

The strong macroeconomic background may support Asian equities over the long term. More immediately, equities remain range-bound in the first half of this year. That reflects the current pressures on the Chinese economy and weak earnings revisions. Equities may also encounter bouts of volatility, given the low levels of liquidity and the fact that the Chinese government has only just begun to implement market stabilisation measures.

However, concerns about weak Chinese growth may recede as policymakers there become increasingly active, and consumer confidence returns. Moreover, given the value to be found in Asian markets, share buybacks, and the cumulative effect of the policy actions taken so far, markets could see reasonable progress from the second half of 2024 onwards. The technology sector—particularly the semiconductor sector in Taiwan and South Korea, and internet platform names in China—are likely to be the key market drivers.

As ever, Asian equities will face risks in 2024. These range from concerns about the ability of the Federal Reserve to engineer a soft landing to the extent to which the Chinese government is willing to intervene to support its economy. Overall, however, Asia appears to offer compelling opportunities for Asia-based investors, with lower valuations than in the U.S. and favorable long-term economic prospects.