Asian Equities: Select Opportunities Amid Mixed Earnings Outlook
Despite a mixed earnings outlook, the outlook for Asian equities looks constructive as some of the 2022 macro headwinds are becoming tailwinds.
Asian equities have shown signs of stabilization in the first quarter of 2023, with earnings forecasts bottoming. After the market’s strong style rotation into value since 2021, the growth style is gaining ground. The corporate earnings outlook for 2023 is likely to be mixed across Asia—while the tech sector in Korea and Taiwan is expected to see double-digit earnings declines, as it struggles with weak demand in the first half of the year, double-digit earnings growth recovery is likely in China/Hong Kong due to the economic reopening and policy easing. In India and the ASEAN nations (Indonesia, Malaysia, Philippines, Singapore and Thailand), a continuation of decent to solid earnings is expected this year as a result of cyclical and structural drivers.
Despite the mixed earnings backdrop, the region’s macro picture shows particular promise, especially as some of the macro headwinds from 2022 are turning into tailwinds in 2023. Should the U.S. Federal Reserve approach a pause in its most aggressive rate hike cycle, the potential peaking of the U.S. dollar against Asian currencies could enable Asian central banks to pause policy or at the least ease monetary tightening according to local conditions. Indeed, inflation across Asian countries has generally peaked and has started to surprise on the downside. March PMIs showed expansionary trends for large domestic demand economies like China, India, and Indonesia, while export-oriented economies including Taiwan, Korea, and Vietnam are indicating a contraction.
Distinctive Factors Create Select Opportunities
In addition, China’s decisive pivot to growth will likely continue to unfold over the course of the year with the property sector showing signs of recovery. We believe the positive impact on company fundamentals should be more pronounced in the second quarter of 2023, especially given the depressed earnings in the second quarter of 2022, which reflected Shanghai’s COVID outbreak.
Ironically, despite having the most challenging earnings outlook in Asia, Korea and Taiwan posted the strongest equity market performance in the first quarter as investors positioned themselves for the anticipated trough in tech demand around mid-year, and the expected strong corporate earnings rebound in 2024 as demand recovery is met with curtailed supply growth. Beneficiaries of the U.S. Inflation Reduction Act like Korean companies in the electric vehicle (EV) battery supply chain, as well as companies with exposure to generative artificial intelligence technologies, also outperformed.
There are a number of distinctive factors that are likely key to support ASEAN corporate earnings going forward. For instance, Thai companies look poised to benefit from a recovery of inbound Chinese tourists as well as a boost to consumption from election spending and populist policies. Companies in the Philippines are likely to continue to benefit from economic reopening tailwinds and a pause in the central bank’s aggressive rate hike cycle. In Indonesia, domestic consumption, an improving credit cycle, and structural catalysts such as increased foreign direct investment and the EV transition could help to boost profits. Finally, after the first quarter’s underperformance, Indian companies’ valuation premium has retraced to more palatable levels, reflective of the strong structural growth potential in the country.
Our Approach
We continue to see value in Asian companies with exposure to major secular growth themes. These include 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). The recent share price corrections have made valuations more attractive, and we would look for opportunities to purchase companies at attractive prices.
At Barings, while stylistic rotations have caused some volatility across markets, our approach remains anchored in our Growth-at-a-Reasonable-Price (GARP) investment philosophy. . At the stock selection level, this approach ensures that overpaying for a company’s growth is avoided, while at the portfolio construction level it ensures that the strategy is not overly exposed to unintended styles or risks.
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