The nascent revival in North Asian equities is being touted as the start of a potential bull run as bets for China’s gradual reopening and the bottoming out of the chip industry intensify.
Strategists at Goldman Sachs Group Inc said they expect Asia’s equity leadership to shift from Southeast Asia and India to markets such as China and South Korea next year.
Meanwhile, Societe Generale SA said Taiwan’s tech-heavy market is also at an inflection point, and Jefferies Financial Group Inc has echoed similar views.
Photo: Isaac Lawrence, AFP
“Of concern to us is that Southeast Asia is beginning to underperform in the last few weeks, as investors rotate back into North Asia,” CLSA chief equity strategist Alexander Redman said.
“Indonesia, as a defensive, domestically oriented commodity exporter, was a logical refuge to ride out the equity storm,” he said, adding that the market would be “less favored as investors re-engage some deep value cyclical exposure in North Asia.”
Key equity gauges in Hong Kong have rallied about 20 percent this month, easily topping the rest of Asia and major global peers, as China urged more targeted COVID-19 restrictions and boosted policy support for the real-estate sector.
Foreigners have piled US$5.8 billion into Taiwan stocks this month, on track for the first inflows in six months and the biggest in 15 years. Net purchases of South Korean shares are set to exceed US$2 billion for a second straight month.
In contrast, Indonesia’s market — once investors’ favorite as an inflation hedge — is flat this month, and poised to see monthly flows turn negative for the first time since July.
Investors are also more wary about valuations in India, where benchmarks recently hit record highs, with Goldman Sachs expecting the market to relatively underperform next month.
“Any positive catalysts such as a potential China reopening and policy support, lowering of geopolitical tensions or tech cycle bottoming is likely to drive a sharp rerating” of North Asian markets, Jefferies strategists led by Desh Peramunetilleke wrote in a note.
The brokerage is overweight on Taiwan, Hong Kong, China and South Korea, neutral on Indonesia and underweight on India.
The bullish case for Taiwan and South Korea is also built on their chip dominance, as the markets are home to industry heavyweights such as Samsung Electronics Co and Taiwan Semiconductor Manufacturing Co (TSMC, 台積電). They also have China as their largest trading partner.
SocGen and Lombard Odier Private Bank this month joined Morgan Stanley in saying that investors should tip-toe back into Asia’s semiconductor stocks.
“Share prices typically bottom out two-to-three quarters ahead of the bottom of the semiconductor cycle,” SocGen strategists led by Alain Bokobza wrote in a note last week. “We may be at this point.”
Chinese shares in Hong Kong are poised for their best monthly showing since 2006, as asset managers from M&G Investments and Eastspring Investments to Franklin Templeton Investments buy into the rally.
On the mainland, foreign funds have snapped up about 49 billion yuan (US$6.83 billion) worth of stocks via trading links with Hong Kong.
That is not to say the road uphill for North Asia will be smooth.
With their heavy export dependence, the markets are vulnerable to the risk of a global recession and are often at the center of geopolitical tensions that involve the US and China. Further, a record jump in COVID-19 cases is also tempering positive market momentum.
“There are ongoing concerns from the geopolitical side of the consideration,” William Blair Investment Management LLC portfolio manager Vivian Lin Thurston said.
Even though the industry cycle is turning, “if the global economy is getting into a slowdown, I think we have to reevaluate the cycle and the thesis,” she added.
Nonetheless, with earnings forecasts having fallen deeply across northern economies, markets might have more upside potential. Equity benchmarks in China, South Korea and Taiwan are down more than 15 percent year-on-year, while those in Indonesia and India are up about 7 percent each.
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