Asian Equities: Progressively Constructive as Tailwinds Emerge

The near-term outlook for Asian equities is improving, with some of the macro headwinds facing the market in the past 18 months likely to turn into tailwinds. One key example is the expected reversal of U.S. dollar strength, which is supportive for domestic consumption in Asia. As a result, Asian performance laggards in the year’s first half could catch up in the coming months, while leaders consolidate their strength and build on the year’s rally. If the second half of the year sees central-bank tightening efforts wind down and earnings to guide higher, investor sentiment toward Asian equities should also improve.

India and Southeast Asia Lead, Eyes on Policy Support in China

China’s post-COVID recovery lost steam in the second quarter in the absence of strong supportive stimulus. With manufacturing PMI contracting for a third month, the current domestic economic weakness is likely to prompt the introduction of supportive policies in the coming months. Potential measures could include interest rate cuts, additional fiscal spending, tax incentives, property market easing, and investments in green infrastructure. Decisive support and regulatory easing, as well as possible further thawing of U.S.-China relations could help reverse the market’s current negative sentiment.

Meanwhile, India’s valuation premium has been justified by its economic and corporate resilience. Foreign investors returned as the market’s long-term structural appeal became even more compelling as an alternative to China. With India’s domestic investment cycle back in an upswing, we see particular value opportunities in Indian banks and industrials.

Looking across to the Korean and Taiwan markets, companies are likely to benefit from an expected upswing in semiconductor demand in the next 18 months. The recent pace of AI development has added conviction to Korean and Taiwanese companies with exposure to the theme. In addition, the Korean market offers other interesting bottom-up opportunities, including stocks that benefit from the global popularity of K-pop music and K-beauty.

Tourists are flowing back to Southeast Asia, driven by supportive government policies and pent-up demand from North Asia. ASEAN is also receiving a growing share of the world’s capital investments ranging from low value-added manufacturing to the hardware technology supply chain. The longer-term thesis of Southeast Asia as a beneficiary of supply chain diversification remains well intact, with Chinese companies extending their supply chains to the region.

Our Approach

Given the variety of the 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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