Asian Equities: A More Positive Outlook

2022 saw one of the worst annual performances in Asian equities since the Global Financial Crisis. Despite this, we are constructive on the asset class for the year ahead—especially as we see the potential for some of the headwinds from last year to turn into tailwinds, for a number of reasons. For one, China’s earlier-than-expected exit from a zero-COVID policy, and a decisive pivot back to growth, supports a more optimistic outlook for the Chinese economy. Second, the explicit acknowledgement of the economic importance of platform economies and the end of the regulatory tightening on internet and property sectors remove a valuation discount from policy overhang. Further, the Chinese government’s concerted efforts to invigorate and prioritize growth, alongside the tailwinds from the economic reopening, are likely to drive an economic recovery this year—and potentially shift the global growth momentum back to Asia.

Should inflation subside over the next few months, and interest rates in the U.S. reach a peak, the U.S. dollar’s strength will likely moderate—which is a positive tailwind for Asian equities. Fundamentally, stable exchange rates provide policy leeway for Asian central banks to adjust monetary policies suited to domestic conditions. Milder inflationary pressures, normal labor market conditions, and disciplined fiscal policies pave the way for a potential peak in Asian interest rates this year.

Select Opportunities Remain in a Volatile Market

Following a strong rally in November, the outlook for Asian equities in the year ahead looks constructive—but the next few months are expected to remain volatile. Further, while earnings downgrades in the region are well-advanced, the expected softness in the economic outlook for developed markets may weigh on externally exposed sectors and markets, such as technology and Taiwan and Korea. Nevertheless, Asian companies, particularly Korean and Taiwan technology businesses, have been discounting these factors since 2022, and investors looking to position themselves ahead of the earnings inflection will provide support to markets.

In India and ASEAN countries more specifically, tailwinds from the economic reopening and a greater exposure to domestic demand resulted in relative outperformance in 2022. At the same time, ASEAN countries also benefited from the rally in value companies. The long-term secular drivers for these two regions remain, while the credit cycle continues to improve. However, in the case of India, a high valuation premium makes the investment case less compelling this year. Meanwhile, Thailand is expected to enjoy a strong recovery in its current account from the return of Chinese tourists and falling freight rates. Strong commodities demand may continue to benefit Indonesia, especially for minerals required for the green transition. Both Thailand and Indonesia should also enjoy consumption support with key elections coming up this year and in 2024. Meanwhile, a weak current account balance and inflationary pressures in the Philippines may ease this year, supporting the region.

Against this backdrop, we see value in Asian companies that are exposed to the 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). The recent share price corrections have made valuations more attractive, and we continue to look for opportunities to purchase good companies at attractive prices.

At Barings, while the 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.

23-2707706