What’s Driving Performance Across Asian Equities?

What are the key factors driving performance across Asian equities?

Given that inflationary expectations appear to be peaking, with concerns shifting from inflation to a potential recession, markets have started to price in a less aggressive U.S. Federal Reserve (Fed), while falling oil and other commodity prices have also helped to ease profit margin pressures for Asian companies. These factors have provided support to the Asian equities asset class as a whole, with most regions in Asia—with the exception of China and Hong Kong—seeing a positive rebound since July.

At the same time, the gradual reopening of economies has been positive for sentiment on ASEAN markets. India also rebounded on resilient earnings, while foreign investor flows have returned to positive territory after 10 months of outflows. While overall sentiment has improved, we are closely monitoring company earnings. In particular, while ASEAN company earnings on the whole have reversed back to positive growth territory, led by Singapore, export-driven markets like Korea may be further impacted by the weaker economic outlook in developed markets.

Meanwhile, Chinese equities have declined in recent weeks due to a number of concerns—including the resurgence of COVID, geopolitical tensions and property market concerns—but negative earnings revisions appear to have bottomed to some extent. Supportive policies and ongoing normalization from COVID disruptions could help to boost domestic activities in China going forward.

In terms of performance, are there specific Asian equities markets that can potentially decouple from China in the short term? What about the long term?

This year, regions that have had stronger earnings momentum have outperformed Chinese equities such as Indonesia, India and Thailand, where economic reopening tailwinds are boosting domestic demand and/or reviving tourism, which is supporting the earnings recovery momentum. In the case of Indonesia, the country is also benefiting from strong commodities prices. On the other hand, export-driven markets such as Taiwan and Korea have underperformed China, more so from concerns over slowing global growth.

In the longer term, we believe the performance of individual Asian markets will be driven by country-specific growth factors, including monetary and fiscal policies, and importantly, exposure to companies with solid sustainable growth at attractive valuations. For example, in China, we have a preference for high-quality companies that have exposure to structural themes such as localization—which includes changing consumption trends and electric vehicle (EV) manufacturing—global renewable infrastructure manufacturing (solar and wind), and strategic self-sufficiency (manufacturing semiconductors). And in India, we believe industries that are well-positioned to increase domestic market share and reduce import reliance stand to benefit. In ASEAN countries, themes such as supply chain diversification, consumer upgrades, and the adoption of technology are key fundamental drivers of long-term performance.

Going forward, where do you see opportunities emerging across the asset class?

We believe the economic reopenings in ASEAN countries, as well as the overall consumption upgrade and digitization megatrends in Southeast Asia, will create attractive opportunities in companies with exposure to these themes. We also see value in companies with exposure to structural growth trends that have high entry barriers—including companies in the renewable energy supply chain in China, key semiconductor manufacturers in South Korea and Taiwan, and select businesses within the EV supply chain.

At Barings, we believe bottom-up, fundamental analysis is crucial for stock selection, rather than top-down allocation. Our approach remains anchored in our Growth-at-a-Reasonable-Price (GARP) investment philosophy. At the stock selection level, we believe this approach helps us to avoid overpaying for a company’s growth, while at the portfolio construction level, it helps limit exposure to unintended styles or risks.

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