US Fed bets on price review: China, Japan, South Korea, India look attractive as value investing in Asia increases

A prolonged high interest rate environment has increased confidence in cheap Chinese stocks and promoted value investing strategies in Asia.

Corporate reforms in Japan and South Korea will support the value thesis, according to JPMorgan Asset Management and Allianz GI. Meanwhile, M&G Investment Management is attracted to Chinese stock valuations, which are near record lows. Other refuges include exporters and India’s domestic stocks.

Having started the year with high hopes that the US Federal Reserve’s monetary easing would lift markets across Asia, multi-asset managers are now becoming more selective in a vastly different environment. There is. Hawkish policy shifts by the region’s central banks aimed at protecting currencies have made bonds, the traditional safe-haven asset, less attractive and placed the onus on stocks to deliver profits.

Gary Tan, portfolio manager at Allspring Global Investments, said, “Prolonged interest rates will be a headwind for capital inflows into Asia,” and in this environment, “domestic investment,” such as Indian infrastructure stocks and South Korean reforms, “Some of the sectors we focus on could be safe haven assets.” He added that the relationship between beneficiaries and China’s domestic consumers and utilities is also important.

The latest market prices indicate the Fed will begin easing in November, a sharp departure from previous expectations of up to six rate cuts by 2024. Foreign funds have sold more than $7 billion in stocks in emerging Asia, excluding China, through April, it said. The company is on track for its first outflow in six months, according to data compiled by Bloomberg.

The outlook for currencies and bonds is even gloomier. A longer period of Fed tightening means that U.S. Treasuries will remain more attractive than foreign Treasuries. Local currency government debt in emerging Asia, compiled by Bloomberg, has fallen by 1.7% in dollar terms this year. MSCI’s Asia-Pacific stock benchmark rose by about the same amount.

As the Fed’s bets reprice, here are some Asian sectors that managers are watching:

cheap china

Stocks in China and Hong Kong have been buoyed by moderate inflation and Beijing’s attempts to revive growth, making markets less susceptible to Fed policy bets. Signs that economic momentum is improving and corporate profits are improving are also attracting capital into markets that have been shunned until now.

Gautam Samarth, multi-asset fund manager at M&G Investment Management, likes China and Hong Kong because of their “compelling valuations” and “idiosyncratic” trends.

Global emerging market funds have moved from underweight to neutral on mainland Chinese stocks, while Asia fund exposure is now at a seven-month high, HSBC Holdings Plc strategists said in a note. Meanwhile, UBS Group upgraded Chinese stocks from neutral to overweight, citing improved earnings outlook.

Optimism helped Hong Kong’s stock index become one of the world’s best-performing major indexes in April, driven by Beijing’s efforts to support Hong Kong’s status as a financial hub. The Hang Seng Index rose nearly 9% this week, its best performance since 2011. Despite the rally, the benchmark is trading at 8.3 times forward earnings estimates, below its five-year average of 10.2 times.

japanese finance

Despite approaching a technical correction, Japanese stocks remain the top investment for many, thanks to the country’s revival of growth and push for corporate reform. High interest rates in the United States refer to the yen, which has fallen about 10% against the dollar since the beginning of this year, but despite the risk of intervention, it is likely that the yen will continue to depreciate for some time.

George Efstathopoulos, a money manager at Fidelity, said: “Japanese stocks, whether exporters or tourism-related industries, will benefit from a weaker yen and improved global demand, but Japanese banks will also benefit through higher government bond yields. I will accept it,” he said. International.

The Bank of Japan’s gradual but expected move towards interest rate hikes is also creating a sweet spot for financial stocks. Buoyed by expectations for higher yields, the Topix Bank Index has risen about 25% this year, nearly double the rise in the broader benchmark.

“Financial institutions should be in Japan,” said Michael Kelly, head of global multi-asset at New York-based PineBridge Investments, adding that Japan has “quite a large amount” of investment. He added that it was done.

Korean values, India

Another area of ​​concern is South Korea’s chip sector, where the government is focused on eliminating the so-called “Korea discount” that gives the market an advantage over its Taiwanese peers.

“Tactically, we are looking forward to a strong recovery thanks to South Korea’s export-led recovery supported by stronger semiconductor growth, US demand resilience, and China’s bottoming trend,” said Jijiang Yang, head of Multi-Asset Asia Pacific. , we particularly like Korean stocks.” At Allianz GI.

The Korean stock benchmark’s revenue is expected to rise 73% next year, the fastest growth in Asia. The price-to-earnings ratio (PER) is about 10 times, compared to 17 times for Taiwan’s TIEX index.

Separately, Indian stocks remain long-term favorites for many, despite their lofty valuations, due to the country’s huge consumer base and growing manufacturing capabilities.

Jing Yuejue, multi-asset solutions investment specialist at JPMorgan Asset, said India “stands out as a country with strong domestic consumption, supported by strong demographics and macro stability,” adding, “Global companies are So too is the trend to rethink global supply chain footprints.” It benefits the country’s goods and services sector. ”