Asian Equities: Finding Opportunity in a Volatile Market

Chinese equities are slumping to their lowest levels since 2020. What's driving the current bear market and when do you think it could reach a bottom?

There are several factors driving the Chinese equities market today. For one, regulatory crackdowns on after-school tutoring and online gaming, combined with monopolistic practices in e-commerce space and deleveraging in the property sector, have dampened growth prospects for the Chinese economy and domestic consumption. Rigorous style rotations took place across the equities markets. Secondly, China’s new waves of COVID cases this year have led to strict lockdowns under the country’s “zero tolerance” policy, which has caused further disruption to domestic consumption and manufacturing activities in China. At the same time, the war in Ukraine is exacerbating the challenges facing an already fragile global supply chain, adding further uncertainty to the post-pandemic recovery.

Over the last 12 months, the Chinese equities market was impacted by numerous risk factors. Given this, we believe that the majority of the downside and pessimism have already been priced in by the market. In fact, there is a case to be made that China is currently one of the more attractively valued markets, given that its medium- to long-term structural growth thesis, in our view, remains intact. We believe the COVID situation could moderate in the coming months, which—combined with expected further supportive policies from the government—could lead to potentially higher economic growth in the second half of the year. In the near-term, while macro and consumption pressures may lead to downward revisions in corporate earnings, sentiment may be poised to rebound once the market agrees that the end of the tunnel is nearing.

The government has pledged support for the housing sector, and property shares have rebounded considerably from their lows in March. Do you think the worst is over for the Chinese property sector?

Current market consensus suggests that regulatory crackdowns on the Chinese property sector have largely played out, and that relaxation measures could be on the way. In fact, dozens of cities have already rolled out relaxation measures in the past two months to support local demand, such as reducing purchasing restrictions and lowering down payment ratios. The government has also called for banks to maintain loans to developers, and has sought measures to help troubled developers through debt restructuring and other funding support.

However, it may still take some time for the sector to unwind. The current relaxation of property sector policies are still focused on lower-tier cities, where demand has been weak. Material relaxation in major cities may be necessary to support a fundamental recovery. COVID-related lockdowns are also impacting sales and new projects in some key cities, and privately-owned developers’ debt payment schedules remain heavy in the near-term. Ultimately, an outright recovery of the sector will be contingent upon the government’s COVID response, meaningful relaxation of policies in major cities, and progress in debt restructuring for some of the larger and more troubled developers.

Companies around the world with exposure to the semiconductor sector appear to be facing strong headwinds—in particular, a number of key players in East Asia have been impacted. What is your view on the sector today?

Electronics and semiconductor companies have been hit hard as China’s lockdowns have led to further supply chain bottlenecks and logistics disruptions. These issues could persist and weigh on the semiconductor sector in the near term. However, relative to more economically sensitive sectors, the semiconductor supply chain may actually fare slightly better. For example, we have not seen any rush orders nor any big order cuts. And throughout the pandemic in 2020 and 2021, semiconductor companies in Asia learned to better adjust their inventory and prepare for supply shocks.

Semiconductor technology leaders in Asia will likely survive the cycle, and will also likely emerge stronger from current headwinds in the long term, as we have seen in the past. In fact, there are a number of secular demand drivers that are providing support to the sector, such as strong demand for more and faster data consumption, digital connectivity across personal smartphones, as well as smart homes and smart cars.

Going forward, what are some of the biggest risks facing regional Asian markets?

There are a number of risk factors going forward. For one, overly aggressive tightening by the U.S. Federal Reserve could lead to a recession. A stronger U.S. dollar is another potential headwind for Asian equities. The energy crisis in the EU and policy tightening in the U.S., combined with China’s economic soft patch, may also lead to weak external demand for more export-oriented economies like Taiwan and Korea.

Meanwhile, geopolitical risks from the war in Ukraine are ongoing and remain of great concern. While the long-term impacts of the war are impossible to quantify at this stage, it is possible that things could escalate before getting better, resulting in further volatility across markets going forward.

Where are you seeing compelling opportunities across the market today?

Escalated geopolitical tensions in Eastern Europe and COVID lockdowns in major cities in China have dominated headlines lately, along with large spikes in energy and commodity prices on the back of supply chain disruptions, which have made an already bad inflation situation worse—especially for developed markets that have seen higher levels of pressure. Some Asian economies, particularly in the ASEAN region, are likely to be more resilient to these inflation pressures. For example, commodity-exporting countries in the ASEAN region such as Indonesia and Malaysia are able to mitigate inflationary pressures with subsidies. At the same time, a number of ASEAN economies are continuing to re-open, and hence not experiencing as tight of labor conditions as elsewhere.

While the impact of inflation on demand needs to be monitored, we expect the medium to longer-term outlook for Asian equities to remain attractive, as the region is supported by structural growth potential and demographic benefits. Specifically, we see opportunities in Asian companies with exposure to 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).