Chinese and Indian stocks are being watched as potential outperformers in Asia later this year as investors flock to emerging market themes.
About a third of 19 Asia-based strategists and fund managers informally surveyed by Bloomberg News said they expect Chinese stocks to outperform most over the next six months, with a similar number naming India as their top pick, and Japan a distant third.
Expected Federal Reserve rate cuts are seen as a boon for two emerging markets, each with its own story: Survey respondents favored Chinese stocks due to low valuations and hopes of policy changes, and Indian stocks due to post-election optimism and relative immunity from geopolitical tensions.
“We see valuation discounts and stronger global growth creating an opportunity for emerging markets, particularly in Asia, to take the lead in the second half of the year,” Joseph Little, global chief strategist at HSBC Asset Management, said in his interim outlook.
Emerging stocks in the region are already doing well: The MSCI Emerging Asia Index rose the most since 2009 in the fourth quarter, outperforming the broader MSCI Asia index. Emerging Asia was nominally the most bought region in June, while global stocks were sold off at the fastest pace in two years, according to Goldman Sachs’ prime brokerage desk.
India’s stock market has been on a rally since Prime Minister Narendra Modi’s ruling party secured enough support from key allies to form a coalition government and secure his third consecutive term in power. The country’s stock market value surpassed $5 trillion for the first time in June as Modi promised policy continuity and foreign investors returned to the market after a two-month hiatus.
A separate Bloomberg survey on India showed the country’s stock rally could accelerate towards the end of the year as investors remain confident about corporate profit growth and the upcoming federal budget could provide a further boost to areas such as consumer spending and infrastructure.
Ray Sharma Ong, head of multi-asset investment solutions for Southeast Asia at abrdn, likes Indian equities as “multiple factors, such as the government budget, are yet to be priced in” and sees Indian equities as “most protected from the US-China tensions and the ripple effects of the US presidential elections.”
Meanwhile, Chinese stocks have struggled after a strong rally earlier this year, with several major indexes undergoing a technical correction in recent weeks.But both a broader Bloomberg survey and a separate China-focused survey found that analysts and asset managers are optimistic about the world’s second-largest stock market over the next six months as global funds return and corporate earnings improve.
HSBC Holdings Plc is bullish on China, expecting a “gradual turnaround in the very negative sentiment towards Chinese stocks,” according to Asia equity strategist Gerard van der Linde, who is adding to his position for the second half of the year, citing a “gradual improvement in the Chinese economy.”
The broader survey also noted that geopolitical tensions stemming from the upcoming US presidential elections are a major risk for Asian markets, with tougher policies likely to be implemented as US President Joe Biden and former President Donald Trump vie to chart a course towards China.
“The impact of rising tensions between China and the US, or China and Taiwan, will be felt across the region, and no market in Asia will be immune, especially the strongest today,” said Hebe Chen, analyst at IG Markets.
More than half of respondents said Asian stocks will likely outperform U.S. stocks through the end of 2024, thanks to Fed rate cuts and cheap valuations, but most see the gains being limited to 10% or less.
“Asia is poised to outperform in a Fed rate-cutting cycle,” said Sharma Ong. “In addition to lower policy rates, Asia will see stronger economic growth and profitability, stock prices at cheaper valuations and currencies with greater carry against the dollar.”
