Beyond China: the diverse landscape in Asia

Asia has too often been pigeon-holed into a single growth story: China. In reality, Asia is not homogenous. There are multiple themes across the region, from the rapid growth in India, to the resource wealth of Australia, to the technology might of Taiwan and Korea.

Over the past year, India, Korea and Taiwan have outpaced the broader region. Tom Clough, fund manager, Asian Equities at Schroders, says: “The year belonged to semi-conductors and India. Within semi-conductors, Korean and Taiwanese names were oversold amid heightened inventory fears and rebounded sharply. India saw strong government-led fixed asset investment, which allied with the “China-plus-one” narrative led to strong-rerating in manufacturing names.”

In contrast, Thailand, Hong Kong and China were the weaker markets. Chinese markets in particular saw their third consecutive year of falls as ongoing economic weakness, geopolitical tensions and government interference weighed on investor sentiment. Only the state-owned enterprises performed better as the government introduced targets to improve productivity, but this is not where active managers tend to focus.

India versus China

Many of these themes will continue to play out in the year ahead. The biggest decision for many fund managers will be whether to focus on the Chinese market, which is cheap and unloved, but carries significant risks, or look to the other major market – India – which has compelling growth characteristics, but where valuations are expensive.

Most believe there are opportunities in China in spite of its difficulties. The Schroders team is investing in selective Chinese exporters with strong global market share that it sees as being available at attractive valuations.

The Guinness Asian Equity Income fund has around 34% in China*. Edmund Harriss, manager on the fund, says: “China’s economy does remain poorly understood. We have 30% of our portfolio in China and remain optimistic…The idea that China is uninvestable doesn’t stack up in my view. We know there is growth, and we know everyone hates China, therefore valuations are depressed. When will it take off? I don’t know, but as companies build their earnings, and if prices remain where they are, they just get cheaper and cheaper.”

Nevertheless, many Asian managers continue to have holdings in India, particularly outside the more expensive small and mid-cap companies. The Jupiter Asian Income fund holds 18% in India, including conglomerate ITC, as a tool to take advantage of the country’s rapid economic growth*.

Technology

Technology and semiconductors in particular are likely to be a major theme in the year ahead. Semiconductors have had a difficult period, as demand for consumer electronics has slipped, but the demand cycle now appears to be picking up, and there are new sources of growth such as artificial intelligence. The AI-exposed Asian companies have not kept pace with their US equivalents in share price terms.

Against this backdrop, semiconductors are an important holding for many funds in the region. Schroders identifies it as one of its key themes of the year: “Select Korean and Taiwanese semi-conductors are increasing their technology lead against US peers and face less competition against Chinese peers given US tech sanctions. This consolidated sector offers durable high returns on capital.”

William Lam, manager of the Invesco Asian fund, agrees: “The fund continues to have significant exposure to dominant semiconductor companies in Taiwan and Korea. Excitement surrounding AI-related demand persists, but it seems to us that the level of semiconductor demand required to support the growth of AI has not been fully priced into the mega-cap Asian tech stocks.”

But it is not just about semiconductors, there is technology strength across the region. First Sentier Investors says: “As the world embraces a digital future, Asian technology firms should benefit from strong end demand and a growing market. At the same time, lower-cost robots allows manufacturers to automate their processes.”

Global elections

Elections are also likely to exert an influence over the next 12 months. The election in Taiwan took place in January, with the pro-China KMT pitted against the anti-China DPP. While the Chinese government made its displeasure clear at the election of the DPP candidate, few believe it is likely to escalate into military conflict.

There are also elections in India and Indonesia. In India, there is unlikely to be any disruption to the status quo. Prime Minister Modi has proved himself a capable steward of the economy and remains relatively popular. In Indonesia, the popular president Joko Widodo has served the maximum two terms in offices. He has been the architect of an economic regeneration for the country, based on its natural resources. He has also sought to build a regional hub for electric vehicle manufacturing, with the country’s nickel wealth at its heart. All of the three candidates have pledged continuity and there is unlikely to be a significant departure from Widodo’s platform.

In reality, the greatest threat may come from outside, in the form of the US election. If Donald Trump is re-elected as president, it could change the dynamics in the region. There had been some thawing in Chinese/US relations with presidents Biden and Xi meeting in November, but tensions could revive under a Trump presidency.

China-plus-one

The China-plus-one trade has seen global companies diversify their supply chains out of China. Countries such as Vietnam have been notable beneficiaries, and while it is still considered a ‘frontier’ market and not part of the mainstream indices, many active managers have taken positions in Vietnamese companies.  This includes areas such as consumer and financial companies, which provide a route to participate in the country’s growth.

Other countries look set to benefit as well. The Indian government has been quick to recognise the opportunity and has put incentives in place to encourage businesses to set up there. Chipmaker Micron has already set up there**, while Apple has also been pivoting its manufacturing to India***. Thailand and Indonesia may also be beneficiaries from this shift. This may change the pattern of growth across Asia in the longer term.

The IMF projects that emerging and developing Asia will deliver growth of 5.2% in 2024****, higher than any other region in the world – and in spite of China’s relative weakness. There is still much to like within Asia and plenty of growth themes for active managers to get their teeth into.

*Source: fund factsheet, 12 December 2023

**Source: TechWire, 7 December 2023

***Source: TIME, 2 October 2023

****Source: CNBC, 30 January 2024