Asian Equities: Low Expectations, Attractive Valuations

Asia ex-Japan equities are pricing in low expectations and limited investor appetite, after significant earnings and price underperformance as an asset class over the last decade. A rising rate cycle, delayed Covid-19 re-opening versus the West, and cash-rich balance sheets provide a good pathway to grow out of this underperformance. At current discounted valuations, it is time to revisit the investment case for Asian equities.

Sundeep Bihani, Portfolio Manager, Eastspring Investments, discusses the mispricing in Asian equities, credible drivers behind earnings growth in Asia, and the diversification and value in Asian indices.

  • Global investors’ interest in Asian equities has declined considerably over this time. This market indifference has led to low expectations and light positioning in many Asian stocks. While the investment attributes and thesis around Asia’s middle-class income growth, innovation, and exports have not changed compared to the last decade, expectations and the starting point for valuations are different. This investment environment is steering us to an attractive list of good businesses at cheap valuations.
  • A key theme in recent years has been the diversification of global supply chains out of China, mostly into the rest of Asia. The prime beneficiaries have been Vietnam, India, and Indonesia. Many Asian corporates from battery makers to semiconductors are also leading this supply chain diversification. This view adds to the earnings growth potential for Asia in the medium term.
  • Asian companies are increasingly recognising the need to step up on ESG investments and disclosures. In the medium term, the higher decarbonisation capex in Asia (delayed versus Europe which started the transition earlier) has the potential to add to earnings growth and quality.
  • The recent media coverage around geopolitics and investment risks in China has added to global investors’ concerns about investing in Asia. While this offers an opportunity to evaluate previously expensive but attractive Chinese businesses, there are plenty of earnings opportunities in Asian countries with growth drivers that are uncorrelated to China. Eastspring believes in the ongoing strategic shifts around decarbonisation, diversified supply chains, and the higher cost of doing business. It is confident the resulting economic cycle from these strategic shifts is supportive of value’s continuing outperformance in Asia.
  • A rising rate cycle, delayed Covid-19 re-opening versus the West, ongoing supply chain diversification and decarbonisation investments provide a medium-term growth opportunity to recover the underperformance over the last decade. At this point, the investment firm believes the geographic and style allocations over the last few years and investor indifference to Asia should get re-evaluated.
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