Amid this tumultuous mid-year season meeting with a bear market and widespread geopolitical conflict ranging from Russia-Ukraine tensions and US-China trading issues, interest has piqued in Asian stock markets and its value in the coming year.
Robin Parbrook, co-head of Asian equity alternative investments at Schroders notes that it has been a difficult season for Asian stock markets. This is observed as the MSCI AC Asia ex Japan index is now back to pre-Covid levels and to similar index levels as five years ago. “It does feel like we are at a capitulation level in the region and there is a lot of fear in markets,” Parbrook says.
Yet, Parbook notes rising appetites during this time (in the area of Asian equities). “We are now seeing opportunities to “buy a wonderful company at a fair price”,” he says. “This was opposed to 18 months ago when we were often looking at buying “a fair company at a wonderful price”.”
Image: Schroders
Caution on Chinese equities
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Parbrook acknowledges possible scope for a short-term rebound in Chinese stock markets given the extent of the sell-off and negative sentiment, although he continues to stay structurally cautious on Chinese equities.
He explains that this is due to multiple factors, including short-term cyclical ones like the weak housing market, continued adherence to “zero-Covid” policies, and slowdown in exports as global demand for manufactured goods declines.
Other more serious structural factors to be considered include the increasing role of the state in the economy, challenging demographics, elevated debt levels and macroeconomic risks, and geopolitical tensions and commercial cold wars.
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“Given the weak domestic Chinese picture, we want to buy stocks when they are genuinely cheap and once the more difficult earnings outlook is fully discounted,” says Parbrook. “In light of the current backdrop we are still not convinced we are there yet.”
The rise of technology markets
The technology sector on a whole is a favoured one this season, according to Parbrook.
“We have a preference for Taiwan semiconductors, both foundries and chip designers, Korean memory chip makers, and Indian IT software and services,” Parbrook says. “This is the part of the technology sector in Asia where we view there to be real intellectual property (IP).”
“It is also where we expect to see both the strongest growth and, most importantly, highest returns on capital through the cycle,” he adds.
By contrast, Parbrook views technology hardware equipment and assembly as having relatively low IP. “When we look at the battery and solar industries - the current “hot” tech sectors – many of the Asian stocks are hardware assemblers rather than long term high return businesses,” he explains.
Meanwhile, Parbrook also sees that IT capital expenditure spending is particularly strong in India. “We do expect demand for consumer technology products to soften, though we are currently not seeing any material slowdown in corporate spend,” he says.
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Incidentally, Indian IT companies are reporting rising backlogs and are struggling to cope with demand, which is resulting in wars for talent and rising costs. “A moderate slowdown [at this stage] would be welcomed by most companies,” Parbrook adds.
In addition, Parbrook notes how India is still at the beginning of the cloud migration and digitalisation process, where most companies, particularly in the financial services sector, view this as vital. “This is in light of how government expenditure in this space for areas such as healthcare, taxation, services provision is also going to be large,” he explains.
At the same time, Parbrook asserts that he has been mindful of high valuations combined with unrealistic earnings expectations for a number of Indian stocks. “If the current re-set continues, we would also see opportunities in Indian consumer stocks, private sector banks or potentially some of the internet names,” he says.
Optimistic scope for returns
Overall, Parbrook is optimistic on the potential to make returns in Asia in the next 12 months, assuming black swan events and a global recession are avoided, as valuations on a whole are increasingly attractive though reflecting a fairly pessimistic outlook for earnings.
To Parbrook, China clearly has the possibility for a short-term rebound if Covid policies are relaxed, reformed or successful. “However, we believe the best opportunities in Asia in the current sell-off are to pick up best-in-class businesses and global leaders in Taiwan, Korea and Australia,” he adds.
