Fed repricing gives rise to new equities playbook in Asia

A HIGHER-for-longer interest rate environment is burnishing the credentials of cheap Chinese stocks and driving value investment strategies in Asia. 

Corporate reforms in Japan and South Korea will support a value thesis, according to JPMorgan Asset Management and AllianzGI. Meanwhile, M&G Investment Management is attracted by near record-low valuations for Chinese stocks. Other haven plays are exporters and India’s domestic-driven equities.

Having started the year brimming with hopes that the Federal Reserve’s easing will lift markets across Asia, multi-asset managers are now turning more selective under a drastically different environment. A hawkish pivot by the region’s central banks to protect their currencies has sapped the appeal of bonds, a traditional safe haven, putting the onus on stocks to deliver returns.  

“Higher rates for longer do pose headwinds to capital flow into Asia,” said Gary Tan, a portfolio manager at Allspring Global Investments. In this environment, “some domestic-focus sectors could be safe havens”, such as Indian infrastructure stocks, South Korean reform beneficiaries and China’s domestic consumer and utilities plays, he added. 

The latest market pricing indicates that the Fed will start easing in November, a far cry from earlier bets for as many as six cuts in 2024. Foreign funds have sold more than US$7 billion worth of equities in emerging Asia excluding China so far in April, according to data compiled by Bloomberg, on track for the first outflow in six months. 

The outlook is even dimmer for currencies and bonds. A tighter-for-longer Fed means Treasuries will remain attractive over their foreign counterparts. A Bloomberg gauge of local currency government debt in emerging Asia has lost 1.7 per cent in US dollar terms this year. MSCI’s Asia Pacific equity benchmark has gained about that amount. 

Here are some sectors in Asia that managers are looking to as Fed bets are repriced.  

Cheap China

Equities in China and Hong Kong have sprung back to life as benign inflation and Beijing’s attempts to revive growth has allowed the market to be more immune to Fed policy bets. Signs of an improving economic momentum and better corporate earnings are also attracting flows into the once-shunned markets. 

Gautam Samarth, a multi-asset fund manager for M&G Investment Management likes China and Hong Kong for their “compelling valuations” and “idiosyncratic” trends. 

Global emerging market funds have turned neutral from underweight on mainland Chinese shares, while Asian funds’ exposure is now at a seven-month high, HSBC Holdings Inc. strategists wrote in a note. In the meantime, UBS Group AG upgraded China stocks to overweight from neutral, citing improving earnings outlook.

The optimism has turned Hong Kong’s equity benchmarks into one of the world’s best-performing major gauges in April, with Beijing’s efforts to support the city’s position as a financial hub adding to the appeal. The Hang Seng Index rose nearly 9 per cent this week in its best performance since 2011. Despite the rally, the benchmark trades at 8.3 times forward earnings estimates, below the five-year average of 10.2.  

Japan financials

Despite coming close to a technical correction, Japanese stocks remain a top bet for many thanks to the country’s growth revival and a push for corporate reform. High US rates mean the yen – which has fallen about 10 per cent against the US dollar this year will likely stay weak for now despite intervention risks. 

“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,” said George Efstathopoulos, a money manager at Fidelity International. 

A gradual but expected shift towards higher rates by the Bank of Japan has also created a sweet spot for financial shares. The Topix bank index has gained about 25 per cent this year, almost double the advance in the broader benchmark, amid expectations for higher yields. 

“Financials are the place to be within Japan,” according to Michael Kelly, the New York-based head of global multi-asset at PineBridge Investments, who added they are invested “quite heavily” in the country. 

South Korea, India

Another area of interest is South Korea’s chip sector, with the government’s focus on removing the so-called “Korea Discount”, giving the market an edge over Taiwanese peers.  

“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,” said Zijian Yang, head of multi-assets Asia Pacific at AllianzGI. 

Korean equity benchmark’s earnings are expected to grow by 73 per cent next year, the most in Asia. It trades at about 10 times of price-to-earnings ratio compared to 17 times for Taiwan’s Taiex Index. 

Separately, with a huge domestic consumer base to cater to and rising manufacturing prowess, Indian equities remain a long-term favorite for many despite pricey valuation.  

India “stands out as a strong domestic consumption story, supported by strong demographics and macro stability,” said Jin Yuejue, a multi-asset solutions investment specialist for JPMorgan Asset. “A trend of global corporates re-thinking their global supply chain footprint also benefits the goods and services sectors in the country.” BLOOMBERG