From Indonesia, where resource wealth is driving a consumer boom, to Vietnam, where foreign direct investment is an engine for change, to India, where sound economic management and innovation are creating new opportunities. But in 2023, investors focused on a single story – China.

We remain firmly dug into Asia and continue to lean into the diversity of the region; gravitating to its highest quality companies aiming to side-step its bear traps. In the year ahead, Asia’s other stories may start to get more attention from investors, even if China’s trajectory remains difficult to predict.

Technology

The revival of the semiconductor industry has become an important theme. The world is ending a period of de-stocking and entering a period of restocking, which is creating broad demand for semiconductors. Deloitte is predicting global sales of US$588 billion in 2024 – 13% better than 2023 – fueled by a revival in demand for memory chips and PC/smartphone sales.

Data center growth is also providing a major boost for the sector. Artificial intelligence (AI) is every bit as important to the Asian market as it has been in the US market, driving growth in data centers (AI demands significant computing power), and a demand for chips.

Booming economies

Indonesia has moved from a ‘fragile five’ economy to a thriving export and consumer economy. Its natural resources have been the catalyst, but we remain focused on the growth in the consumer sector. Economic growth across India is buoyant with domestic demand and private investment driving growth. However, market pricing increasingly reflects that growth. In particular, there has been a significant rally in small- and mid-cap companies where valuations now look stretched. We are finding more opportunities in large companies.

For infrastructure, cement may not be glamorous, but it is in high demand. Thanks to rising populations and the need for residential buildings. The growing demand for non-residential buildings and public infrastructure, including healthcare centers and hospitals, has led to opportunities for product consumption. Vietnam is also benefitting from companies moving manufacturing away from China.

China

This leaves the thorny problem of China. Clearly, there is growth, but it remains unrewarded by the market. Last year’s weakness was almost universal, with only energy and communications services companies doing well. There was some excitement around the state-owned enterprise (SOE) reform agenda announced last year. The government announced a raft of measures designed to make SOEs more profit-oriented and introduce proper incentive plans.

We remain skeptical of this initiative and have very little exposure to SOEs. The weakness elsewhere has left the genuine growth companies in China looking even cheaper. While there has been some economic weakness, and remains a tough environment, and it is difficult to find a catalyst likely to trigger a rebound in the market. Exports are strong, retail sales are increasing, and savings rates are normalizing. Earnings growth compares favorably to other equity markets with earnings in China growing faster than the US last year and expected to do the same this year (Chart 1).

Our strategy is not to ignore China altogether. There are still plenty of growth opportunities and pockets of innovation. At some point, pessimism for China will peak, which will put the focus more firmly on earnings and shareholder returns.

China is currently the cheapest of all the world’s major stock markets, cheap compared to history, and at a historic low when compared to the US or India. With so much bad news priced into Chinese equities, a period of calm and some incrementally better news flows opens the possibility of a market bounce. That said, we continue to monitor the developments in geopolitics and the property market closely.

Final thoughts

We remain focused on areas with good visibility on earnings and weeding out any potential investments containing question marks. However, we recognize its limitations.

We believe the situation in China has distracted investors from the very real opportunities elsewhere in Asia. It is undoubtedly an important growth engine for the region, with its idiosyncratic growth opportunities, but the region has plenty to offer with or without China. It taps into many of the world’s growth stories, from AI and the energy transition, to supply chain re-engineering. These fundamentals are increasingly overlooked, but we hope investors will start to look beyond China’s problems to the broader Asian growth story in the year ahead.

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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