Asian Equities Shift Focus, Eye Growth in Key Sectors

Key Takeaway

• Asian investors shift focus to equities, favoring domestic sectors in India, Korea, and China due to a higher-for-longer interest rate environment.
• Chinese and Hong Kong equities attract attention for their valuations; Japanese financials and South Korean chip sector see growth.
• Emerging market currencies gain for carry trade amid global hawkish monetary policies; Hong Kong market revival driven by liquidity and strong earnings.

Interest Rates Impact on Asian Markets

The current financial landscape, characterized by a higher-for-longer interest rate environment, is reshaping investment strategies across Asia. Investors, initially optimistic about a potential easing by the Federal Reserve, are now adopting a more selective approach as regional central banks pivot hawkishly to defend their currencies. This shift has diminished the allure of bonds, traditionally seen as safe havens, and placed greater emphasis on equities for returns. Gary Tan, a portfolio manager at Allspring Global Investments, notes, "Higher rates for longer do pose headwinds to capital flow into Asia," highlighting the potential of domestic-focused sectors in India, Korea, and China as relative safe havens.

Sectoral Shifts in Focus

Amidst the changing monetary policy landscape, certain sectors and regions are emerging as focal points for investors. Chinese and Hong Kong equities are gaining attention due to their attractive valuations and insulation from Fed policy shifts, spurred by benign inflation and pro-growth measures from Beijing. Gautam Samarth from M&G Investment Management points to the "compelling valuations" and "idiosyncratic" trends favoring these markets. Similarly, Japanese financials are benefiting from the country's growth revival and corporate reforms, with the Topix bank index significantly outperforming broader benchmarks. In South Korea, the chip sector stands out due to government efforts to enhance market valuation, while India's strong domestic consumption story continues to attract long-term investment interest.

Emerging Market Currencies and Carry Trade

The spread of hawkish monetary policies from the Federal Reserve to emerging market (EM) central banks is creating new dynamics in currency markets. Strategists from Citigroup Inc. and JPMorgan Chase & Co. suggest that emerging-market currencies are becoming more attractive for carry traders. This shift is evidenced by actions from central banks in Brazil and Indonesia, which are adjusting their rate policies in response to global monetary conditions. The adjustment in expectations for Fed rate cuts has also influenced market strategies, with swaps traders now anticipating fewer reductions in 2024.

Hong Kong Market Revival

Hong Kong's stock market is witnessing a significant revival, buoyed by China's commitment to enhance liquidity in the financial hub and a series of strong earnings reports. The Hang Seng Index's performance, coupled with an influx of mainland funds and regulatory support for listings, is fostering optimism for a sustained market recovery. Despite recent gains, the Hong Kong Exchanges and Clearing Ltd. stock remains well below its peak, suggesting potential for further growth. Analysts from Goldman Sachs Group Inc. and UOB Kay Hian highlight the impact of reforms and a recovering turnover on the market's prospects.

Street Views

• Gary Tan, Allspring Global Investments (Neutral on Asian markets):

  "Higher rates for longer do pose headwinds to capital flow into Asia... some domestic-focus sectors could be safe havens such as Indian infrastructure stocks, Korean reform beneficiaries and China’s domestic consumer and utilities plays."

• Gautam Samarth, M&G Investment Management (Bullish on China and Hong Kong):

  "Likes China and Hong Kong for their compelling valuations and idiosyncratic trends."

• George Efstathopoulos, Fidelity International (Bullish on Japanese equities):

  "Japan equities are set to benefit, whether it’s the exporters or tourism-related industries, through a combination of a weaker yen and improving global demand, but also Japanese banks through rising government bond yields."

• Michael Kelly, PineBridge Investments (Bullish on Japanese financials):

  "Financials are the place to be within Japan."

• Zijian Yang, AllianzGI (Bullish on South Korean equities):

  "Tactically, we particularly like Korean equities, thanks to the country’s export-led recovery supported by rising semiconductor growth resilient US demand as well as a bottoming-out trend in China."

• Jin Yuejue JPMorgan Asset (Bullish on India):> "India stands out as a strong domestic consumption story supported by strong demographics and macro stability. A trend of global corporates re-thinking their global supply chain footprint also benefits the goods and services sectors in the country."