Despite the challenging macroeconomic backdrop, the MSCI World equities have posted year-to-date returns close to 19%1. Developed markets have outperformed Asia ex Japan equities as China and Thailand continue to drag the region. Still there are outperformers with Taiwan, India and Korea posting double digit returns. ASEAN markets however underperformed the broader Asian region.
As we head into 2024, a mild recession is likely in Developed Markets as the cumulative effects of rate hikes kick in. Emerging and Asian economies are expected to be more resilient given that rate hikes in this region have been more modest, and inflation is mostly back to target levels. Unlike the US, Asian economies are also not experiencing wage pressures and imbalances in their labour markets, and Asian central banks are in a more comfortable position to cut rates. At the same time, China could become a bright spot for investors once again should growth surprise on the upside.
On a longer term, Asia’s structural drivers are expected to underpin growth. We are still at the start of the China plus one supply chain relocation trend. The momentum is picking up across ASEAN, India, and other Emerging Markets; cheap labour, strong manufacturing bases and lower geopolitical risks have resulted in rising foreign direct investments and increasing capital expenditure by private sector companies in the region. Separately rapid urbanisation, a fast-growing population and rising middle class will drive higher consumption per capital growth. Asian economies with large domestic consumption should also be able to offset any export slowdown.
Asia has much to offer investors. A combination of developed economies and emerging high-growth economies at different stages of economic development can offer unique opportunities. Equally there is a variety of opportunities across multiple industries – both in the traditional and new economy sectors. Yet Asia ex Japan equities are pricing in low expectations. At current valuations, we believe it is time to revisit the investment case for Asian equities.