Xin-Yao NG, investment director of Asian equities, abrdn, looks recent Asia market movements and comments on the outlook for Asian equities.
Asian equity markets posted marginal gains in April, but they outperformed developed markets. Sentiment was influenced by the ongoing tensions in the Middle East, positive GDP data in China and lowered market expectations for early policy rate cuts by the US Federal Reserve given the strength of the US economy and sticky inflation.
Equity markets in China and Hong Kong outperformed the wider region as China’s first-quarter GDP growth was slightly better than expected at 5.3%1. The Indian market maintained its steady upward momentum on the back of a positive macroeconomic backdrop, while voting began in the general election, although the final results are not expected until June.
Technology-driven Korea and Taiwan took a breather following gains in the previous two months, and Indonesia also lost ground as the central bank surprised investors with a 25 basis-point policy rate increase designed to support the rupiah which had weakened to a four-year low 3.
April was a positive month for Asian stocks with China market leading the way. An often-neglected fact is that the renminbi has been relatively resilient among Asian currencies, such that markets like Japan and Taiwan have done very well year-to-date in local currency terms, but have been pegged back in US dollar terms. With interest rates staying higher for longer, the US dollar is likely to stay stronger, which makes the currency effect significant.
The Hong Kong dollar is pegged to the US dollar, giving it defensibility in that aspect. In US dollar terms, Hong Kong is now one of the best performing markets in Asia this year thus far. In particular, Hong Kong-listed Chinese stocks as measured by Hang Seng China Enterprises Index have done very well.
Drilling down, the China rebound was initially led more by value and a theme around capital management, almost like the “Value-Up” trends in Japan and Korea. We saw stocks outperform where the companies raised dividend payouts or share buybacks meaningfully, offering attractive returns to shareholders. As the saying goes that “only when the tide goes out do you learn who has been swimming naked”.
At a time when the economy continues to be soft, only the companies that are fundamentally sound with a resilient business and competitive edge, strong cash flow and a clean balance sheet are well placed to help themselves by supporting the share price with capital returns.
Towards the second half of April, though, we started to see a broad market rally on the back of talk of economic support measures being announced at the latest Politburo meeting. The session did result in signals of intent, especially around the clearing of inventory in the struggling property sector, which boosted market sentiment, albeit we did not see meaningful new measures announced immediately.
We maintain our view, which we have held for some time, that there is tremendous value in the China market for stock pickers, but we are less included to chase rallies that are not fundamentally driven.
Positive outlook
We continue to be positive on the outlook for Asian equities. Rates and inflation have likely peaked in the US setting the scene for rate cuts in Asia, albeit performance of the companies in the portfolio are not reliant on that and the outlook is bright due to the broad-based growth across Asia and the fundamental strength of the companies in the portfolio which are typically leaders in the industries or markets in which they operate.
Furthermore, the turnaround in the IT and semiconductor cycle, green transition and near-shoring as a result of geopolitics continues to benefit companies and countries in Asia. China is clearly showing signs of bottoming and recent corporate results have underscored the strength of some business franchises. Ultimately, we continue to have conviction in our holdings and their ability to navigate the various crosswinds buffeting markets.
Over the longer term, we see the most attractive opportunities around some key structural themes in Asia.
Rising affluence is spurring growth in premium consumption in areas including financial services, while urbanisation and an infrastructure boom is set to benefit property developers and mortgage providers.
Growing technology adoption and integration means a bright future for plays on gaming, internet, fintech and tech services like the cloud, with Asia’s tech supply chains well positioned for the rollout of 5G, big data and digital interconnectivity.
In healthcare, Asia is home to a diverse range of companies leading advancements in biotech and medical device technology.
The region is also in the driver’s seat when it comes to the green transition with plays on renewable energy, batteries, electric vehicles, related infrastructure, and environmental management all having a bright future.
Main image; kyle-glenn-nXt5HtLmlgE-unsplash
