(News Bulletin 247) – Overall, Asian indices have suffered since the start of the year in China and emerging countries, unlike Japan, South Korea and Taiwan. Blame it on a lackluster economy in the world’s second largest economy, which indirectly weakens several other countries.

These are markets sometimes ignored by investors when their importance is already considerable and even destined to increase: the major Asian markets. After all, Japan and China are already the world’s second- and fourth-largest stock exchanges by capitalization, according to Credit Suisse. And according to Barclays, the continent accounts for 44% of global economic growth.

“Yet Asian equity markets remain underrepresented in the portfolios of many investors, particularly in Europe and the United States,” said the British bank.

“For some investors, it is easy to justify not investing in (this) region. First, Asia is physically (and often culturally) distant from the West and corporate governance there is often seen as weak. Second, recent geopolitical tensions (around Taiwan in particular) have dampened investors’ appetites. s.

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Japan, South Korea and Taiwan on the right track

However, the first part of the year in certain Asian markets is eye-catching. We had already mentioned the case of the Tokyo Stock Exchange, which recorded a jump of 24.5%

of the Nikkei 225, thanks to many factors, such as relatively low inflation, better economic prospects with the end of “stagflation”, important reforms in the governance of listed companies as well as the interest of the famous investor Warren Buffett. But the Taiwan Stock Exchange (+21.4%) also surprises positively, thanks, explains Bloomberg, to efforts to improve the readability of information at the level of foreign investors. The Seoul Stock Exchange also posted remarkable growth (+16.3%).

Stocks in South Korea and Taiwan have mainly benefited from an influx of foreign investment, linked to the craze for artificial intelligence (AI), the main theme of global markets in this year 2023, market operators being on the lookout for companies upstream of the industrial chain on this subject, such as semiconductor groups or foundry companies for this segment. More broadly, these two markets benefited from the recovery of “tech” stocks and the entire related ecosystem.

“The hunt for semiconductor stocks amid optimism about AI demand has been a key theme for investors, and South Korea and Taiwan’s significantly higher exposure to this sector could explain the higher amount of net inflows compared to the rest of the Asia region,” Yeap Jung Rong, market strategist at IG, told Reuters.

Vietnam surprises, India lags behind

However, the picture is less glorious on the side of emerging Asian markets. Vietnam is an exception, with an increase of 16.5% since the start of the year, significantly higher than that of the CAC 40 (+14.1%). Dragon Capital, a local fund manager, says the performance was driven by policy rate cuts from the country’s central bank – a 180-degree turn in monetary policy far removed from current actions by major Western central banks – fiscal stimulus from the government, and an influx of foreign capital. But beyond that, the other places suffer. The Bombay Stock Exchange certainly won 9.3%, but this figure remains a bit pale compared to the performance of Western countries. As pointed out bywall street journal

, the Indian market suffered from valuations considered expensive, with Indian equities having generally progressed in 2022, unlike many emerging countries. The market’s reputation may also have suffered to some extent from accusations of fraud by the short seller Hindenburg Research – which has an excellent reputation – against Adani Group, the conglomerate of billionaire Gautam Adani.

China leads other Asian indices

Then comes all the other Asian stock markets, starting with the disappointing performance of the Chinese indices. Those of mainland China (Shenzhen and Shanghai) are barely up 2%, while Hong Kong is struggling (-4.3%). Other places are in the hard, like Singapore (+0.7%) but also Indonesia (+0.2%), Malaysia (-5.9%), the Philippines (+0.7%) and especially Thailand (-8.8%).

All of these countries obviously have close trade ties with China, so the lackluster start to the year in the world’s second-largest economy has had a knock-on effect on them. For example, according to Krungsri Research, a subsidiary of the Japanese bank MUFG, China represented 15% of Thailand’s foreign investment on average over the period 2018-2022 and 12.5% ​​of its exports (and 27.6% of its tourists in 2019). For the Philippines, Malaysia and Indonesia, China constituted between 14% and 19% of exports between 2018 and 2022, again according to Krungsri Research.

“The weakening of China’s reopening rebound will weigh on the recovery of emerging countries such as Thailand and Hong Kong, whose tourism sectors are highly dependent on Chinese visitors,” Capital Economics said.

Since the beginning of the year, many Chinese indicators have pointed to a very sluggish recovery despite the country’s economic reopening, which began in January. In the second quarter, Chinese growth only amounted to 6.3% over one year when economists were anticipating 7.3%.

“The recovery is struggling to materialize in struggling sectors, such as real estate, and is already running out of steam in those that are doing well, such as consumer discretionary,” explained in a recent note Atlantic Financial Group. Youth unemployment exceeds 20% and the real estate sector, a traditional pillar of growth in the country, remains in crisis. “The Chinese used to invest in stone, by acquiring a second or even a third property. The over-indebtedness of developers like Evergrande, and the resulting market implosion, generated significant capital losses for Chinese households. Their strategies for investing their savings are now less focused on this type of asset”, develops Atlantic Financial Group.

Services also suffered the blow, notes Capital Economics. In the end, the Chinese government is aiming for growth of only 5% this year, a figure light years away from rates above 6% or even 7% in the years preceding the pandemic.

Towards a rebound?

Obviously, certain specific factors are hurting Asian markets outside China. Political uncertainty also weighed in Thailand, where general elections were held in May, with a breakthrough by the progressive party Move Forward, the consequences of which are still difficult to determine.

Indonesia may suffer from the fall in the prices of ordinary metals, for example nickel, to which the economy is very exposed, but also from a high valuation, the Jakarta Stock Exchange having ended 2022 in the green. The Philippines are also penalized by the deterioration of the economic situation in the United States, a major vector of employment for Filipino expatriates who contribute up to 10% of the country’s economy, according to Bloomberg. High inflation and the restrictive monetary policy of the central bank of the Philippines also played a role. Malaysia is also suffering from rate hikes by its central bank as well as a declining trade balance and significant political instability, with four successive governments since 2018.

It should also be noted that the rise in the interest rates of the major central banks, those of the Federal Reserve (Fed) in the lead, may also prompt fund managers to reallocate their investments to developed countries versus emerging countries.

However, the trend could change. UBS highlights the low valuations of Chinese and Thai stocks, being optimistic on these two countries for the future. The Swiss bank anticipates in particular targeted stimulus measures from the government which could revive growth in a range of 5% to 5.5%.

“Despite the slowdown in China’s recovery over the past few months, which has occurred alongside the rebound in mobility, the improving labor market, credit transmission and recovery in the real estate sector are only in their infancy and will be important drivers of growth in the second half and beyond,” said Stephen Innes of SPI Asset Management.

“To increase their exposure to Chinese equities, investors will need concrete evidence confirming that economic fundamentals are improving and that real estate, diplomatic and regulatory risks are gradually dissipating. At that time, and probably when the dollar depreciates, capital flows will naturally flow into Chinese stock indices because they are very cheap, “says Atlantic Financial Group.