Market: China, Japan, Thailand… Which Asian stock markets are performing best this year?

(BFM Bourse) – Overall, Asian indices have suffered since the start of the year in China and emerging countries, in contrast to Japan, South Korea and Taiwan. Blame it on a flawed economy in the world’s second largest economy, which indirectly weakens several other countries.

These are markets that are sometimes ignored by investors when their importance is already significant and even destined to increase: the major Asian markets. After all, Japan and China are already the world’s second- and fourth-largest stock markets 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 many investors’ portfolios, particularly in Europe and the US,” the UK bank said.

“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 investor appetite. p.

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Japan, South Korea and Taiwan on the right track

However, the first part of the year in certain Asian markets stands out. We had already mentioned the case of the Tokyo Stock Exchange, which registered 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 management 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 to efforts to improve the readability of information by foreign investors, Bloomberg explains. The Seoul Stock Exchange also had remarkable growth (+16.3%).

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

“The hunt for semiconductor stocks amid optimism around AI demand has been a key theme for investors, and South Korea and Taiwan’s significantly higher exposure to this sector may explain the higher volume 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 bright on the side of the emerging Asian markets. Vietnam is an exception, with an increase of 16.5% since the start of the year, significantly higher than the CAC 40 (+14.1%). Dragon Capital, a local fund manager, says the performance was driven by interest rate cuts by the country’s central bank – a 180-degree monetary policy shift far from the current actions of major western central banks – fiscal stimulus from the government and an influx of foreign capital. But beyond that, they suffer elsewhere. The Bombay Stock Exchange certainly gained 9.3%, but this number remains a tad pale compared to the performance of Western countries. As pointed out byThe Wall Street Journal

, the Indian market suffered from valuations seen as expensive, with Indian stocks generally gaining in 2022, unlike many emerging economies. The market’s reputation may also have suffered to some extent from allegations of fraud by short-seller Hindenburg Research – which has an excellent reputation – against the Adani Group, billionaire Gautam Adani’s conglomerate.

China leads other Asian indices

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

All these countries obviously have close trade relations with China, so the weak 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 Japanese bank MUFG, China represented 15% of Thailand’s foreign investment on average over the 2018-2022 period and 12.5% ​​of its exports (and 27.6% of its tourists in 2019). For the Philippines, Malaysia and Indonesia, China accounted for 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 economies 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 was just 6.3% over a year, when economists expected 7.3%.

“The rebound is struggling to materialize in difficult sectors, such as real estate, and is already running out of steam in strong performers, such as consumer discretionary,” Atlantic Financial Group explained in a recent note. Youth unemployment exceeds 20% and the real estate sector, a traditional pillar of the country’s growth, remains in crisis. “The Chinese used to invest in real estate by acquiring a second or even a third property. Developers like Evergrande’s excessive indebtedness 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. Ultimately, the Chinese government is targeting growth of just 5% this year, light years away from rates above 6% or even 7% in the years leading up to the pandemic.

Heading for a rebound?

It is clear that certain specific factors are hurting the Asian markets outside of China. Political uncertainty also weighed on 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 drop in prices of common metals, for example nickel, to which the economy is very exposed, but also from a high valuation, where the Jakarta Stock Exchange has ended 2022 in the green. The Philippines is also being punished by the worsening economic situation in the United States, an important 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 interest 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 increase in the interest rates of the major central banks, led by the Federal Reserve (Fed), may also cause fund managers to reallocate their investments to developed countries versus emerging countries.

However, the trend may change. UBS highlights the low valuation of Chinese and Thai stocks and is optimistic about these two countries for the future. In particular, the Swiss bank expects targeted stimulus measures from the government that could revive growth within a range of 5% to 5.5%.

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

“In order to increase their exposure to Chinese stocks, investors will need concrete evidence confirming that economic fundamentals are improving and that risks in the real estate market, diplomatic and regulatory areas are gradually disappearing. At that time, and probably when the dollar falls, capital flows will naturally flow into Chinese stock indexes because they are very cheap,” says Atlantic Financial Group.