Asian Equities: Opportunities Emerge, but Caution is Key

Despite expectations for the interest rate environment in the U.S. to stay higher for longer, and amid heightened uncertainty across global markets today, there are a number of reasons to suggest Asian equities remain relatively well-positioned. For one, as the relative strength of the U.S. dollar moderates, the asset class should be supported. In addition, the majority of Asian central banks remain on track to ease monetary policies next year. At the same time, as we head into the seasonally stronger quarter of the year, markets are likely to receive some support from the recently improving economic data in China and a stronger earnings growth outlook for the region in 2024.

Opportunities Across the Region

In China, the numerous policies to stabilize and reinvigorate the economy appear to be gaining traction with August’s industrial production, retail sales, and September’s PMI figures showing signs of improvement. Data from October’s Golden Week holidays suggests consumption recovery is on track. While investor sentiment remains muted, we believe further policies to address weak demand and high leverage in the property sector, support from China’s local government financing vehicle (LGFV), improving economic data, and a potential turnaround in corporate earnings will likely boost sentiment—especially given their attractive valuations.

Elsewhere, with the expected bottoming of the global semiconductor cycle this year, investors have re-rated Taiwan and Korea ahead of the possible fundamental turnaround next year. The rapid adoption of generative AI has helped accelerate the troughing out and recovery of specific parts of the semiconductor and tech hardware value chain. Given that we are at the initial stages of this secular growth trend, we see opportunities in supply chains in Korea and Taiwan, which are best positioned to benefit from this powerful long-term trend. There are also opportunities in interesting Korean mid-cap companies such as those in the medical aesthetics space, where Korea has a competitive advantage.

Meanwhile, Southeast Asia is on track for a solid recovery in tourism in 2023 driven by supportive government policies and pent-up global demand. The momentum is likely to continue well into 2024 with the gradual return of Chinese visitors. We are constructive on a number of structural and company-specific opportunities across Southeast Asia, such as consumption uplift in Indonesia until its election in early 2024, supply chain relocation opportunities in Malaysia, and beneficiaries of supportive policies from a business-savvy Thai government.

The long-term outlook for Indian companies is also compelling, but well known. As a result, valuations remain at a premium to the region given a superior and sustainable earnings growth profile for Indian companies. Yet despite India’s structural growth attraction—given the strong outperformance since last year—the market risks being used as a funding source should sentiment around China improve. Nevertheless, we are monitoring market movements should any attractive entry points emerge.

Our Approach

Given the variety of opportunity set, we believe it is important to take a disciplined, bottom-up approach to stock selection. We continue to see value in Asian companies with exposure to major secular growth themes: 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 longer term.

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