Investing in Asia: Embracing opportunities, managing risk

Investment opportunities in Asia can be found across the region as we head into 2025. However, much rests on the outlook for Asia’s dominant economy, China. If China’s economic momentum improves, we see value opportunities in Chinese equities, especially for private sector companies that have enhanced their profit margins and corporate fundamentals. Improved market sentiment towards China may also be expected to attract more investment flows back into Asian markets.

Artificial intelligence demand may boost selected Asian markets

Growth in most Asian economies slowed in the third quarter of 2024, notably in Hong Kong, South Korea and Taiwan. This slowdown aligns with the recent decline in export momentum across Asia, which is driven by cyclical weaknesses in the global manufacturing sector and a gradual moderation in semiconductor export growth.

However, semiconductor exports from north Asian markets, such as Korea and Taiwan, are expected to increase in the near to medium term, supported by ongoing demand for chips that can drive artificial intelligence (AI) applications, as AI technologies become increasingly embedded in mobile phones, personal computers and other consumer tech products.

Inflation and interest rate outlook remains supportive

Inflation in Asia has generally remained weak, even though India’s inflation rose recently, driven by higher-than-expected food prices. However, India’s core inflation remains soft. Against this backdrop, Asian central banks would be expected to maintain their bias towards cutting interest rates, but the pace and timing of any rate cuts may be limited if US tariff concerns create currency pressures. At the same time, changes in US interest rates may also prompt Asian central banks to focus on defending their currencies rather than cutting rates to support their domestic economies.

Importantly, China is now starting to take powerful action to boost its economy. In late September 2024, the Chinese authorities announced a series of coordinated monetary, fiscal and property easing measures, with early signs of improvement now starting to emerge. However, any recovery in China’s property market will likely be slow due the continued excess of unsold properties and caution among potential buyers. Investors may also now start to worry about potential higher tariffs and geopolitical uncertainties as the new US administration takes charge in Washington.

Domestic growth could help support Chinese stocks

However, the US has viewed China as a competitive rival for some time. Trade concerns are not new, and are likely already priced in. Most Chinese companies listed in the on-shore A-share market generate revenue domestically, and so local demand is much more crucial than US demand.

As a result, while severe US tariffs may impact China's exports, domestic policy measures to support the economy are likely to be a more significant driver for Chinese equities. In a slow growth environment, high-dividend and defensive stocks such as banks, energy and state-owned enterprises have historically performed well.

However, if China’s economic momentum improves in 2025, we see value opportunities in Chinese equities, especially for private sector companies that have boosted their profit margins in recent years. Improved market sentiment towards China could also attract more capital flows back into other Asian markets.

Economic outlook is positive for India but valuations are high

In India, economic momentum should improve from a recent dip, boosted by stronger consumer demand, a pickup in government spending, private investment spending and interest rate cuts. Government policies are aimed at expanding India’s economic growth beyond traditional sectors, such as financials, information technology and consumer staples, to new sectors, such as consumer discretionary and new-age disruptive businesses tailored for the local market.

Additionally, the ongoing global supply chain reorganisation could boost demand for infrastructure, as India develops into a manufacturing hub capable of competing with China and the South-East Asian markets. The beneficiaries will likely be transport and infrastructure companies. India’s demographic strengths and long-term growth potential remain robust. It is no surprise that Indian equity market valuations are high, reflecting strong earnings expectations. However, given time and continued growth in profitability, this optimism could be justified.

Long-term appeal for South-East Asian markets

Like India, South East Asian markets (including Indonesia, Singapore, Thailand and Malasia) may be expected to gain from the ongoing shift in supply chains. Also like India, earnings growth should be supported in the medium term by favourable demographics, a growing middle class and increasing consumption. However, with valuations in region around the 15-year average, South East Asian stocks are more attractive compared to India.

While active bottom-up stock selection is crucial due to the wide variation in macroeconomic and stock fundamentals across the South East Asia region, higher dividend payout ratios are appealing for income-seeking investors, further enhancing the region’s long-term investment appeal.