Asian Equities: A Constructive Outlook, but China is a Wildcard

The Asia ex-Japan equity markets saw bifurcated performance in 2023. For instance, there was strong structural growth from Indian equities, and the bottoming out of the semiconductor cycle benefitted Korea and Taiwan companies—but China and ASEAN equities saw multiple compressions despite positive earnings growth. Looking ahead, we are constructive on Asian equities overall, as we not only believe that structural growth opportunities continue to exist, but we also expect to see some recovery in the markets that have performed poorly last year.

Opportunities Across the Region

In the U.S., moderating inflation and a strong labor market have set the stage for a likely soft-landing scenario this year. This suggests that global central banks now have the flexibility to tailor their monetary policies based on their domestic conditions, which is generally supportive for global economic growth. Against this backdrop, Asian exports could see a pickup in orders, led by inventory restocking as well as a recovery in the global tech sector. At the same time, the potential for U.S. interest rate cuts in 2024 could result in a marginally weaker U.S. dollar, which should be supportive for global liquidity.

Since its post-COVID reopening in 2023, China’s economic recovery has been weak with government policy support below market expectations. This year, we expect the focus of policies to shift from stabilization toward growth, and, as a result, there could be a rebound if investor confidence returns given the current attractive valuation of Chinese equities.

India’s economy has proven to be resilient over the past three years, compounding at around 6-7% annually.¹ Structural growth on the back of India’s demographic dividend is well underway, and the likelihood of policy continuity has increased given the recent favorable results for the ruling party in the state elections. We believe there is potential for some consolidation in the strong performers, but we are also looking to add on to these opportunities.

We are constructive on the technology sector in Taiwan and Korean markets, given their dominant positions in the global semiconductor and memory supply chains. AI-related demand is shifting toward commercialization of software and hardware products, which is driving structural demand. We also see opportunities associated with the rising popularity of Korean culture, such as medical cosmetics and K-pop music.

Across Southeast Asia, we are relatively constructive on companies in Indonesia and the Philippines. Policy continuity is expected in Indonesia following the upcoming election in February (or July if a second round is needed). Strong domestic demand and prudent fiscal and monetary policies are positive for Indonesia’s long-term structural growth. While inflation was a headwind for the Philippines in 2023, moderating energy prices and global inflation should support positive earnings growth. In Singapore and Malaysia, we are positioned for the recovery of the global technology cycle. Thailand’s underperformance in 2023 was primarily due to its extended election cycle, policy uncertainty, and a delayed return of tourists from China. These factors are likely to improve in 2024, and alongside the planned cash handouts by the Thai government to stimulate domestic consumption, this could be supportive of a number of cyclical opportunities.

Our Approach

Given the variety of opportunity set, it is important that we take a disciplined, bottom-up approach to stock selection. We continue to see value in Asian companies with exposure to major secular growth themes such as technological ubiquity (digitalization and connectivity of everything), evolving lifestyle and societal values (sustainability, millennial/Gen Z consumption trends, healthy living) and de-globalization (supply chain diversification/bifurcation and reshoring).

At Barings, while style rotations have caused some volatility across markets, our approach remains anchored in our Growth-at-a-Reasonable-Price (GARP) investment philosophy. This has positioned our portfolios favorably for the long term.

1. Source: IMF. As of October 2023.

24-3370667