The International team asks what the 2024 rebound in Asian equities could mean for some of our favourite growth stocks
Over the past few years, Asian equities have lagged their global peers by a wide margin, with a series of challenges weighing on company profits and investor sentiment. But in the first five months of 2024 this trend has reversed, with the Chinese, Hong Kong and Japanese markets all delivering strong returns and outperforming most other regions.
What has changed, and is there a strong case to be made that recent green shoots for Asian stocks could evolve into an enduring trend?
Capital at risk.
Why have Asian stocks suffered in recent years?
Asia struggled more than the western world from the Covid-19 pandemic, with physical lockdowns lasting considerably longer than in Europe and the US. As a result, several businesses have only recently begun to benefit from a normalisation in economic activity and consumer behaviours.
For example, travel activity in Japan has only recently rebounded above pre-Covid levels (reaching a monthly record in April) and the last remaining pandemic-related restrictions in China were not lifted until 2023. This has significantly impacted company profits across a range of industries.
Regulations, largely aimed at protecting Chinese consumers, had also weighed heavily on several Asian internet platforms that had previously enjoyed high levels of profitability and earnings growth. At the same time, heightened geopolitical risk had curtailed overseas growth prospects for some Chinese businesses, notably those operating in health care and technology, leading to a broad-based sell-off in China-exposed names.
A turning point in policy
But Chinese regulation is now becoming more accommodative of big technology conglomerates. This is allowing leading platforms, which have suffered in recent periods, to resume attractive profit growth. The Chinese authorities have also begun taking action to stimulate the economy and the stock market, which has revived sentiment recently.
These measures have included a reduction in down payments for properties, availability of cheap funds for public housing and improvements to the transmission between onshore and offshore stocks.
While there have been no specific stimulus measures in Japan recently, it is worth pointing out that interest rates there remain in negative territory. This has underpinned a sustained period of yen weakness, making many Japanese manufacturers more competitive and increasing the yen value of overseas income.
The stars are aligning for exceptional companies
Overall the macro-economic picture in Asia is improving, but what makes us most excited is the recent operational performance of some of our favourite Asian growth companies. During the most recent quarterly results, Chinese internet platforms Tencent and Pinduoduo, Korean ecommerce business Coupang, and Singaporean-listed entertainment and ecommerce business Sea Ltd, all reported strong earnings growth that exceeded expectations.
Each of these businesses benefits from a long growth runway as Asia's population expands and rises in wealth. Although their share prices have recently improved, each still trades at a sizable discount to the major US internet platforms and offers major upside potential.
In Japan, several of our favourite growth stocks also reported strong results and enjoyed a welcome recovery. These include premium skincare specialist Shiseido and online real estate and marketing services platform Recruit. Again, their valuations stand out as attractive in a global context.
Asia's middle class is set to grow rapidly over the next decade and beyond, and the opportunity set for attractive businesses poised to benefit from this is vast. With policy turning more supportive, valuations at multi-decade lows and increasingly positive market sentiment, it feels like an opportune time for investors to pay attention.
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This communication was produced and approved in June 2024 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
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