2024 Midyear Asia Equity Outlook: Focusing on Select Stocks

• Asia continues to offer compelling investment opportunities, benefiting from various opportunity sets across the region.

• Asia is a growing consumer of goods versus primarily a producer of goods.

• China may offer alpha-generating return potential for long-term investors despite mixed near-term signals and ongoing US-China trade tensions.

• India remains one of the fastest-growing countries, led by advancements in digitalization, rising consumption potential, and energy transition initiatives.

We believe Asia continues to offer compelling opportunities for equity investors, benefiting from a range of opportunity sets across the region.

China is a case in point. With US-China trade tensions persisting, many investors are choosing to ignore China even though some companies’ earnings have beaten market expectations. Data points show gradual recovery from the lows, albeit from depressed levels; nevertheless, rising paper prices, a pickup in white-goods demand, and an increase in automation capex point to strengthening in economic activity.

Indeed, signals in China remain mixed. The ratio of misses to beats in earnings has narrowed, and on a macro level, measures to stabilize the property market and help digest inventories are a positive indicator of the government’s support. The property easing package announced by the People’s Bank of China (PBOC) encouraging lower downpayment floors, removal of the mortgage floor, a housing provident fund loan rate cut, and a PBOC relending facility should help improve property market demand and restore market confidence. These measures have somewhat eased systematic risk and aided the banking sector, which has broad exposure to property developers.

We believe the divergence in valuations between China and the rest of Asia creates an attractive pool of investment opportunities.

The Valuation Gap Between China and the Regional Index Continues to Expand

Index forward PE valuation comparison (x)

Source: Bloomberg data and PineBridge Investments analysis as of 31 March 2024.

Don’t overlook China stocks

China’s stock market includes several opportunity sets: structural changes in the domestic economy; technological advancements that allow companies to benefit from local government spending in the tech sector; and companies that are cost-efficient, with the technological advantages needed to compete globally.

Our research process has revealed quality companies that are trading at low valuations on a regional and global basis. These companies range from grid component manufacturers benefiting from increased government spending to upgrade the grid system in China and abroad, to companies that are global players in optical transceivers, with demand propelling increased data communication needs. The music and entertainment industry in China is also poised for structural growth, as music streaming in China is still in early stages.

These examples highlight that various alpha-generating opportunities in China exist despite the property market’s woes and concerns about weak consumption. Amid the deflationary pressures in China and potential macro deterioration, the weaker signals show signs of bottoming and are coupled with the downward trend in earnings misses. China is shifting from a manufacturer of low-end goods to a high-end technology producer. Companies are also going global, which leads to the creation of multinational Chinese corporations.

As this develops, China will experience “technological unemployment,” which may reduce consumption power in the short term but provide scope for wage increases in the long term amid increased productivity and a technological shift in the economic landscape. More fiscal and monetary measures are expected to help reflate the economy, focusing on manufacturing investment rather than consumption. As such, we believe the more stable market environment and relatively cheaper valuations make for improved equity investment potential.

In ASEAN, selectivity is the name of the game

ASEAN markets have been mixed thus far in 2024. Singapore continues to offer high dividend yields and defensiveness. Singapore banks are well capitalized and boast the highest quality among ASEAN financials. In Indonesia, uncertainty on fiscal policy with the formation of the cabinet will likely cause investors to stay on the sidelines. Thailand faces similar political uncertainty. Malaysia looks promising among the ASEAN countries and is relatively stable. Macro conditions have improved, with the government unleashing RM90 billion in development expenditures for 2024. Renewable energy, the Johor-Singapore Special Economic Zone, and datacenter buildouts are long-term drivers of Malaysia’s economy. Infrastructure plays that have gained contracts over the past few years are our favored sector.

North Asia: Driven by memory demand, with an AI boost

Helped by underinvested capacity, dynamic RAM demand is expected to remain strong in the second half of 2024. Inventory is elevated, especially for PCs, but customers appear more driven by supply availability than price, which should benefit memory companies. Besides memory, the growing demands of artificial intelligence (AI) have led to strong growth in integrated circuit (IC) design companies, and many of these AI software companies are listed in Taiwan and Korea, where we believe the alpha opportunities lie.

AI and Autos Are Driving Strong Growth in the IC Design Service Market

Global IC design service market size (US$ bil.)

Source: WSTS and Bloomberg data as of December 2023.

India: Resilient growth yields opportunities for stock pickers

India is already recognized as the world’s fastest-growing major economy and is currently experiencing robust momentum in its growth trajectory.

Positive investor sentiment reflects this outlook, supported by benign energy prices, expectations of political stability, and a healthy banking system that is providing sufficient capital while benefiting from high credit growth (at over 15%1), low defaults, and the rapid adoption of digital tools.

India’s stock market resilience follows significant domestic retail flows into mutual funds, especially small- and mid-cap funds.

Even the unexpected election result of a coalition government is unlikely to shake investors for long. In fact, with such sound growth drivers, the distinction between pockets of the Indian market that are overvalued and those with strong fundamentals and growth prospects will become much clearer once the dust from the election has settled.

Both Coalition and Single-Party Governments in India Have Coincided With Strong Growth

GDP growth CAGR across different political regimes

Source: Bloomberg (nominal GDP in US dollars) and Reserve Bank of India (real GDP in rupees) as of December 2023.

Our optimism is rooted in key structural themes: In particular, India’s digital transformation, which is core to the delivery of not just commercial enterprises but also government services. The vast data footprint created is, in turn, feeding AI algorithms that should improve productivity, enhance efficiency, and encourage innovation.

However, an effective investment strategy in India typically stems from a focus on earnings rather than stock price momentum. So, while headline valuations might look expensive, we believe the average hides a lot of granular opportunities available to a diligent, bottom-up stock picker.

With this in mind, we find value in three broad areas in India:

• Digital. As this revolution continues to unfold, it is aiding companies in the financial and e-commerce sectors.

• Energy. Benign prices are good for those companies that use energy as a key input in their operations. Businesses driving change in energy generation and usage – such as renewables and electric vehicles – are also seeing structural growth that is not yet fully priced in.

• Demographics. Companies that are able to leverage the country’s young population, in terms of either setting up large manufacturing facilities or capturing export markets, should see multi-year growth.

A consistent philosophy: It’s all about the stocks

We favor a fundamental approach to investing that focuses on researching names with strong business models and attractive valuations – and that means being cautious in periods of exuberance, while seeking opportunities in periods of volatility. In periods of extreme weakness, we believe an approach that emphasizes continual monitoring and due diligence can put investors in the best position to acquire quality stocks at the right price.