Taking stock in Asia

A monthly guide to investing in Asia Pacific financial markets

Performance across Asia has been mixed so far this year. While cyclical markets like Korea, Taiwan, and Japan have rallied in the low-to mid-teens year-to-date, mainland Chinese equities have taken a round-trip back to their 2023 starting point.

For China, the flat returns mask a bifurcated market. E-commerce (–17% YTD) has borne the brunt of losses but value stocks have strongly outperformed, highlighted by gains in high dividend SOE-heavy sectors like banks (+11%), energy (+28%), and utilities (+5%). The rally in global brands exposed to China’s economy is equally telling and suggests investors are buying into the recovery story— even if appetite for direct investments is dampened by concerns over an imminent US executive order limiting high-tech investment in China.

The geopolitical uncertainty has helped compress Chinese equity valuations to just 10x forward P/E, an unusually steep discount for a market where the economy is recovering and earnings are expected to expand strongly in the coming quarters.

Importantly, the middling April data does not reshape our view of a consumer-led recovery— China’s economy, in our view, remains on track to expand 5.7% this year, powering earnings growth of near 14%. With this economic strength and more clarity on US curbs expected in the coming weeks, we anticipate a mid-teens rebound in Chinese equities from here. But given the fluid geopolitical dynamics, we believe a barbell strategy that pairs preferred recovery beneficiaries with high dividend yielding sectors can help investors manage potential uncertainties.

Across the rest of Asia, most economies are now past the worst of the cyclical trough— a tech upswing is set to begin in 2H and international travel by Chinese tourists is gathering pace. With core inflation set to close in on 3% by year-end, a pause from the Fed could allow for rate cuts in Asia as early as 3Q. In this environment, Asian semiconductors (+12%)—where we remain most preferred— and high dividend stocks (+5%) have contributed to 93% of MSCI Asia ex-Japan’s YTD return. We think this outperformance can continue over the next 3–6 months as rates decline and economic growth troughs.

In fact, our analysis of 18 years’ worth of data shows that in the three months before the last Fed hike, high dividend yielding sectors like Asian banks, utilities, and telecoms have historically performed the best. Banks still tend to perform well in the three months after, along with tech, real estate, and consumer discretionary as beneficiaries of lower rates and inflation. We think Korean IT names trading at a decade-low P/B versus global tech are a particularly appealing alternative to more expensive growth segments, while self-help names offer improved risk-reward. Large-cap Japanese banks also remain attractive, trading at 0.6x P/BV and offering a relatively high dividend yield of around 4%.

In fixed income and currencies, we position for lower US rates and a lower US dollar via Asia IG—where we expect high-single-digit returns this year—as well as the JPY and AUD (vs. the USD) and gold. We also continue to favor high-yielding currencies, including the IDR and INR, and China tourism beneficiaries including the THB and CNY.

Ongoing supply risks, further policy support in China, and low speculative positioning keep our longer-term commodity bull case intact despite the correction this quarter. That said, we trim our year-end oil forecast to USD 95/bbl (from USD 105/bbl) given a modest upward revision to our non-OPEC+ supply estimates.

With new catalysts and concerns emerging, we think now is an opportune time to take stock of our trades and recommendations. Our analysis in this month’s edition finds that the overall macroeconomic backdrop and bottom-up trends support an outperformance in regional growth and earnings versus other regions, bolstering our conviction that Asia is well-positioned for a turnaround in fortunes in the second half.

Written with?Mark Haefele, our Chief Investment Officer.

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