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Written by: Gabriela Santos
2023 marked a third consecutive year of double-digit declines for Chinese equity markets. Investors are now reconsidering how to invest in that market and whether investing in Asia is about more than just China. Over the past twenty years, other markets in Asia have delivered strong performance, such as: India, Korea, Taiwan – and more recently, Japan. There markets have overperformed or kept up with U.S. markets, a fact overshadowed by the extreme U.S. concentration in global indices (a 63% weighting in the MSCI All Country World Index). As investors start to decrease their decade-long underweight in international stocks, Asia is a key place to look. The region is at the epicenter of this decade’s biggest trends: artificial intelligence, automation, “friendshoring”, energy transition, and the growth of the emerging market middle class. Opportunities in China still exist, but investing in Asia is about much more than just one story.
The opportunity set in Asia is large: Asia is home to over half of the global population, a third of global growth, a third of global exports, a quarter of global consumption, over a third of global savings – and five of the ten largest major equity markets. Interestingly, certain markets in Asia have a low correlation to Chinese equities, such as Japan at 0.5 and India at 0.6, similar to the correlation U.S. markets have to China. Long-term tailwinds are boosting other economies and markets in the region, suggesting correlations should decline further. These include:
- Japan: The return of inflation and positive interest rates is a game changer for domestically oriented companies. Most importantly, corporate governance reforms are gaining more and more momentum, a key change to change Japan’s 30-year discount to other markets. The post-pandemic decline in Japanese equities’ correlation to the Japanese Yen signals that investing in Japan is about much more than just exporters – and now deserves a strategic, rather than tactical, allocation in portfolios.
- India: The combination of favorable demographics, plus economic policy reforms, should sustain India’s track record of elevated economic growth and may bring over 800 million people into the middle class over the next decade. Plus, India is a key beneficiary of the reorganization of supply chains towards geopolitically aligned countries (“friendshoring”). Most importantly, companies in India have shown the ability to translate strong economic growth into strong earnings growth and equity market returns.
- Taiwan & South Korea: These markets have delivered equity market returns significantly above what their low economic growth would suggest, a result of their 80% and 55% weighting to technology, respectively. These markets are key beneficiaries of the artificial intelligence transformation.
- Southeast Asia: Comparatively smaller markets, like Indonesia, offer investors a way to invest in the energy transition through its dominance of the critical minerals (such as nickel) used in the energy transition.
With that said, it’s important to note that specific equity markets in Asia have different characteristics in terms of liquidity, valuations, earnings quality, and trends. As investors look to markets beyond just the U.S. and seek to diversify their Chinese equity holdings, the broader Asia region has plenty to offer.
Some markets in Asia have delivered strong earnings and equity returns
Nominal GDP growth, earnings and equity market returns, 2004-2023, ann.
Source: FactSet, MSCI, World Bank, J.P. Morgan Asset Management. Earnings and equity market returns are represented by each country/region’s respective MSCI index. Nominal GDP growth, equity returns and earnings growth are calculated in local currency except for Asia ex-Japan and emerging markets, which is in U.S. dollars. GDP for Asia ex-Japan is calculated by adding up nominal GDP in USD for all the 10 countries which are tracked by MSCI Asia ex-Japan. GDP for EM is calculated by adding up nominal GDP in USD for all the 24 countries which are tracked by MSCI EM. Past performance is not indicative of current or future results. Data are as of April 30, 2024.
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