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Optimistic about Asia’s technology powerhouses and improving corporate governance

The world’s fastest growing regional equity market1, Asia ex-Japan, includes two of the five largest economies in the world, China and India, and several of the biggest global technology companies. JPMorgan Asia Growth & Income plc (JAGI) is positioned to tap into all the main drivers of Asian equities, from the global artificial intelligence boom to corporate governance reforms and local economic cycles.

Owning Asia’s technology leaders

The portfolio management team believe that the Asian technology powerhouses are reason enough to invest in the Asia ex-Japan region. As such, JAGI’s biggest overweight vs. the MSCI AC Asia ex Japan benchmark is in the technology sector.

The portfolio’s biggest position is Taiwan Semiconductor Manufacturing Company (TSMC), the largest semiconductor foundry in the world. The company has a near monopoly on creating high-performance computing chips that are increasingly in demand as artificial intelligence (AI) gains traction. The portfolio managers believe TSMC is one of the best businesses in Asia and the stock has contributed strongly to JAGI’s performance, both in 2023 and so far this year.

Growth in AI-related demand has also powered the top-performing stock in the portfolio so far this year, which is Foxconn, a China-listed technology assembly and manufacturing company. However, performance in 2024 has been hindered by another large tech name, Korean technology heavyweight Samsung Electronics, which is the second largest position in the portfolio after TSMC. While Samsung was a strong contributor to performance in 2023, the company’s shares have declined this year on concerns around increasing competition. The company’s ongoing investments in its foundry business have also resulted in a near-term hit to its earnings.

India’s strong equity market is expensive

Recent regional performance has been driven by the Indian stock market. That’s been a headwind for JAGI’s performance, as the portfolio has less exposure to India than the benchmark because the team believe that many Indian companies are already highly valued, leaving little room for upside or error.

They find the Indian market to be expensive relative to its own history and relative to other opportunities being found across the rest of Asia. JAGI is also focused on Indian companies that are conservatively-managed with cheaper valuations, including many financials. So far, these stocks have not participated as much in the broader Indian market rally.

Looking for opportunities in undervalued Chinese stocks

China has been more challenging for JAGI recently, due to continued weakness in the country’s property sector, lacklustre corporate earnings growth and growing geopolitical issues. However, while our positioning in China detracted from the portfolio’s performance last year, it has positively contributed in the first couple of months this year.

At the stock level, the trust has benefited from holdings such as, an online travel agency, which has been boosted by its strong market share and a pickup in demand for travel in the Chinese market.

JAGI currently has a neutral position to the China and Hong Kong markets, although the management team are actively looking for opportunities given the bearish corporate earnings and economic outlook has left many companies looking undervalued on a long-term basis.

Improving corporate governance reforms could boost Korean stocks

Korean companies have traded with a “corporate governance discount” in recent years but it is believed a Japanese-style corporate governance revolution is beginning. From a country perspective, JAGI now has its biggest overweight towards Korea, and the Portfolio Managers have been adding to holdings in the financials sector, where valuations look attractive and where they see the most potential for corporate governance improvements to be made.

One country with a good track record of corporate governance is Indonesia. JAGI has a long-standing overweight to the country and remains optimistic, given recent elections went smoothly, the economy is strong and currency volatility has decreased. The biggest challenge in Indonesia is that the market is no longer cheap after several years of strong earnings growth.

Diverse prospects across the region

Overall, the view on the Asia ex-Japan region is that it is stable but with a big differentiation by market: India has a strong outlook but remains expensive; structural changes in Korea could narrow the discount on its equity market; Taiwan is benefiting from a strong technology cycle as US companies invest heavily; and China’s property downturn continues to weigh on consumer sentiment.

Regardless of market conditions, JAGI invests across the entire Asia ex-Japan region, seeking to provide predictable quarterly income without compromising its focus on growth.

1 World Bank, GDP Data, as at 2023