How It’s Been (And How It’s Going) For Asia’s Stocks

Asian market review in a nutshell

The S&P 500 shot up like a rocket ship in the volatile first six months of 2023, rising 16%, but across Asian stock markets, the gains stayed a lot closer to Earth, with the benchmark MSCI Asia Pacific ex-Japan Index rising just 3%. So let’s take a look back at the region’s stocks – and a look forward at what’s likely to happen next.

The highs

• Artificial intelligence fever: The AI theme gained traction following Nvidia’s positive outlook for chips that power AI apps.
• Tourism and consumer spending: There were signs of a tourism recovery, especially across Southeast Asian countries where domestic demand remains firm.
• Moderating raw material prices: Weaker-than-expected demand due to sluggish economic growth in China dampened prices of most major commodities, including oil and coal, through to June, along with expectations of more interest rate increases to come. This provided companies with some relief from rising costs.

The lows

• China’s slower-than-expected domestic recovery: Initial optimism over a demand boost from China’s faster-than-expected reopening fizzled as macroeconomic data continued to reflect soft domestic demand and fading momentum in exports.
• Inflation and recession risks: Concerns over inflation and a potential global recession continued to cast a shadow of uncertainty on the economic landscape, but inflation in Asia is rolling over and looking more benign than in Europe or the US. We saw the Federal Reserve continue to raise US interest rates but it now looks as though rates are nearing a peak.
• Financial sector woes: The US suffered banking sector stress that later spread to Europe and caused jitters among financial stocks across Asia as well.

The winners

• Korea and Taiwan: These tech-oriented markets performed well as valuations expanded on the back of AI optimism.
• Information Technology sector: The tech hardware and semiconductor segments were among the best performers across the region, driven by signs of a bottoming in the cycle.

The losers

• Chinese stocks: China “A” shares were among the weakest in the region as macro data raised concerns about the strength of the domestic recovery.
• Southeast Asia: The Malaysian market lost out as foreign investors ditched stocks following weaker-than-expected earnings, while political uncertainty after the general election weighed on stocks in Thailand.
• Utilities and healthcare sectors: The defensive utilities and healthcare sectors lost favor in an environment of elevated power prices, high-interest rates, and bond yields.

Spotlight on China

In the first half of the year, investor concerns reemerged over the strength of China’s economic recovery. Those concerns were seemingly justified given softening macro data, and were reflected in weakness in mainland Chinese stocks and in the currency, the yuan.

There’s still significant pent-up demand in China, but so far, this has only fed through to a recovery in services spending. Over time, spending should pick up more, thanks to all the excess household savings that built up during the pandemic. And as reopening benefits fully materialize across the country, there could be a domino effect across many industries, including tourism, travel, healthcare, property, and banking.

The challenge is that it’s difficult to have confidence about when consumer sentiment in China might recover and when the huge pent-up savings might convert into a renewed demand cycle. And as a result, the Chinese stock market appears to have become mostly driven by investor mood, given a lack of direction in both the economic recovery and support from the government.

The future’s likely most promising for firms that are able to adapt to changing regulatory frameworks in areas like digital innovation, green technology, and access to affordable healthcare. But China’s also a huge consumer market with a growing and increasingly affluent middle class, making it attractive to a range of firms over the long term.

Spotlight on India

The Indian economy is in the early stages of a cyclical upswing. It’s one of the fastest-growing countries in the world, thanks to a resilient domestic environment and supportive government policy.

In recent months, the country’s inflation rate has dropped into the central bank’s target range, allowing the Reserve Bank of India to hit pause on interest rate increases. Retail sales growth, meanwhile, has been on an upward trajectory. And with inflation easing, investors are expecting a more robust pick-up in demand in the second half of the year – helping sustain attractive earnings growth and a recovery in return on equity.

On the other hand, India faces some near-term risks. For one, the economy’s exposed to any potential slowdown in global growth. And for another, monsoon season could push food prices and overall inflation higher, whilst also dampening a recovery in rural consumption. Finally, the outcome of the 2024 parliamentary elections also remains a key risk, as political continuity is important for the Indian market.

Outlook: there may be stronger earnings ahead

Analyst forecasts for this year’s earnings for the benchmark MSCI AC Asia Pacific ex-Japan index have been cut by 9% this year. However, investors appear to expect improving earnings momentum in the fourth quarter and through the early part of next year.

Recoveries across Asia continue to gain momentum post Covid, while China – which has the potential to spring back to economic life – could have spillover effects benefitting the rest of the region.

Still-attractive valuations

The benchmark MSCI AC Asia Pacific ex-Japan index is trading at relatively attractive valuations, with a 12-month forward price-to-earnings (P/E) ratio of 13.2x and a price-to-book (P/B) of 1.6x. Asian stocks overall are still trading at a big valuation discount compared to US stocks, but are in line with their European counterparts.