It is remarkable that as recently as 2020, China made up almost 40% of the regional benchmarks. Today, it is just 24%. In its place, we have seen India’s contribution double in just four years from 9% to 18% today, while the tech-heavy Taiwan market has risen from 12–19% over the same period.
These changes reflect the shifting sands of the region’s economic landscape (Chart 1). India is rising as an economic superpower as the growth balance tilts increasingly away from China.
Chart 1. MSCI All Country Asia-Pacific ex-Japan Index’s country weightings (2020 to present)
Southeast Asia also benefits from China’s geopolitical woes as global companies seek to diversify supply chains. Meanwhile, artificial intelligence (AI) is sparking a boom in Asia’s world-leading semiconductor industry (Chart 2). These developments underscore Asia's critical role in driving global innovation and economic growth and create abundant investor opportunities.
Chart 2. MSCI All Country Asia-Pacific ex-Japan Index’s sector weightings (2020 to present)
From where we stand, Asia is now clearly more than just China, with opportunities abounding across the broader region. Investor concerns over China have tarnished Asian markets. However, this overlooks the excellent progress the broader region has made in recent years in strengthening its economies, shoring up its currencies, creating employment, adopting technology, and driving innovation. Today, little of this is priced into markets with the MSCI All Country Asia-Pacific ex-Japan (MXAPJ) Index.1
India’s index position rising (at the expense of China)
China's economic rise since the 1980s has been remarkable, increasing its global economic share from 2% in 1990 to 18.4% in 2021. However, since 2020, regulatory crackdowns, and economic challenges have led to market underperformance.
Meanwhile, India is emerging as an attractive alternative for investors seeking Asian growth exposure (Chart 3). Its economy has consistently grown above 6% recently – driven by a young workforce and economic reforms. Its weighting in the MXAPJ Index has risen from 9% to 18%, while China's has halved to 24%.
Chart 3. India’s year-on-year earnings growth
AI and tech boom benefiting Korea and Taiwan
Tech is eating the world, and Asia is the center of global innovation. Regional companies are at the forefront of emerging technologies such as 5G, AI, and electric vehicles. We believe Asia’s tech hardware and semiconductor supply chain names are the real winners.
Taiwan and South Korea are at the cutting edge of the global technology boom, especially in semiconductors and AI. Both countries are key players in the global tech supply chain, benefiting from the increased demand for advanced technologies.
The region's tech supply chains are becoming more resilient and diversified, and investments in advanced manufacturing capabilities are strengthening Asia's competitive edge (Chart 4).
Chart 4. AI semiconductor demand by end-market
Shifting supply chains proving a boon for Southeast Asia
Southeast Asia is fast emerging as an attractive alternative manufacturing and sourcing destination as some multinational corporations seek to reduce their reliance on China and mitigate geopolitical risks. Two countries stand out. Vietnam is seeing foreign direct investments pour into higher technology sectors, especially automotive and electronics (Chart 5).
Chart 5. Apple suppliers based in Vietnam
The other is Indonesia – the largest economy in Southeast Asia – which is doing well in leveraging its abundant natural resources and large domestic market to attract investment in various industries, including electric vehicle battery production.
Companies largely looking cheap
Asian equities are trading at a significant discount compared to global and US counterparts (Chart 6). The regional benchmark, the MXAPJ Index, is trading at just 17xPE, compared to 22xPE for the MSCI AC World Index and 26xPE for the US S&P 500 Index.1,3,4,5
Chart 6. Asia-Pacific large cap discount relative to S&P 500
We believe this valuation gap – the cheapest in 10 years – presents an attractive entry point for investors seeking undervalued opportunities (Chart 7).
Chart 7. Asia small caps still cheap compared to US markets
Final thoughts
Asia offers a plethora of opportunities beyond China, underpinned by a dynamic India, AI innovation, the tech boom, and Southeast Asia’s growing role in shifting global supply chains. Understanding these positive structural themes is crucial for navigating the complex Asian market and identifying potential areas for growth and returns in Asia in the years ahead.
Current valuations present a compelling entry point for Asian equities. We believe investors who delay may miss out on the potential upside as the market recognizes these favorable conditions.
1 The MSCI All Country Asia-Pacific ex‐Japan (MXAPJ) Index is an unmanaged index considered representative of Pacific region stock markets, excluding Japan. The index is computed using the net return, which withholds applicable taxes for non‐resident investors.
2 "The world’s fastest-growing big economy is living up to its billing." CNN Business, February 2024. https://www.cnn.com/2024/02/29/economy/india-gdp-growth-economy/index.html.
3 Bloomberg, MSCI AC Asia-Pacific ex Japan Index (USD), July 2024. https://www.bloomberg.com/quote/BMAJRHK:HK.
4 The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. With 2,760 constituents, the index covers approximately 85% of the global investable equity opportunity set. DM countries include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK and the US. EM countries include: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
5 The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
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