Great rotation brewing in Asia

Way up north: People walking past the Taiwan Semiconductor Manufacturing Co headquarters in Hsinchu, Taiwan. The bullish case for South Korea and Taiwan is built on their chip dominance. — Bloomberg

TOKYO: 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 as well as the bottoming out of the chip industry intensify.

Strategists at Goldman Sachs Group Inc expect Asia’s equity leadership to shift from South-East Asia and India to markets like China and South Korea next year, while Societe Generale SA says Taiwan’s tech-heavy market is also at an inflection point.

Jefferies Financial Group Inc has echoed similar views.

Stocks listed in Hong Kong as well as South Korea and Taiwan have languished for most of the year owing to their heavy reliance on China’s economy, which has been crimped by stringent Covid controls and a property crisis.

Meanwhile, domestic-demand driven southern markets of Indonesia and India boasted resilience. The tables have turned this month after a slew of positive policy moves by Beijing.

“Of concern to us is that South-East Asia is beginning to underperform in the last few weeks, as investors rotate back into North Asia,” said Alexander Redman, chief equity strategist at CLSA.

“Indonesia, as a defensive, domestically-orientated commodity exporter, was a logical refuge to ride out the equity storm,” he said, adding that the market will be “less favoured as investors reengage some deep value cyclical exposure in north Asia.”

Key equity gauges in Hong Kong have rallied about 20% in November, easily topping the rest of Asia and major global peers, as China urged more targeted Covid restrictions and boosted policy support for the real estate sector.

Foreigners have piled US$5.8bil (RM26bil) 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$2bil (RM9bil) for a second straight month.

In contrast, Indonesia’s market -- once investors’ favourite as an inflation hedge -- is flat in November, 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 in 2023.

“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” Hong Kong, China, South Korea and Taiwan, “neutral” on Indonesia and “underweight” India.

Chips, China

The bullish case for South Korea and Taiwan 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. They also have China as their largest trading partner.

Societe Generale (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$6.8bil or RM30.4bil) worth of stocks via trading links with Hong Kong.

Risks remain

That’s 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 centre of geopolitical tensions that involve the United States and China. Further, a jump in virus cases in China to a record is also tempering the positive market momentum.

“There are ongoing concerns from the geopolitical side of the consideration,” said Vivian Lin Thurston, portfolio manager at William Blair Investment Management. And 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 already fallen deeply across the northern economies, the markets may have more upside potential.

Equity benchmarks in China, Korea and Taiwan are still down more than 15% year-to-date, while those in Indonesia and India are up about 7% each.

For China watchers, a Politburo meeting in early December, followed soon after by the annual Central Economic Work Conference, may offer useful signals. — Bloomberg

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