Caution ahead, but new investing ideas exist
A challenging 2024 outlook with pockets of opportunity mean we will remain selective. Aggregate valuations across Asia look broadly fair.
What is the investment outlook for Asia-Pacific equities in 2024, given the prevailing macro environment (slowing global growth, geopolitical, higher rates)?
China remains at the forefront of investors’ minds. The government introduced more assertive policy support in the summer of 2023, prompting a mixed reaction from the market. Ultimately, the market must distinguish between the current economic cycle and structural drivers. Over the short term, a cyclical rebound is possible, but the long-term structural issues underpinning our cautious view of China have not changed. We believe there is too much debt in the system and insufficient growth, translating into soft consumer inflation data, falling interest rates and currency weakness. All of this points towards a potential debt deflation within the market.
However, stock-specific investment opportunities exist in China, particularly in the consumer and building materials sectors and elsewhere in the region, such as Australia. The Asian technology hardware sector also has an attractive long-term structural growth opportunity as the need for semiconductors increases and a cyclical turnaround appears increasingly likely.
The 2024 outlook remains challenging as global markets grapple with inflation, high interest rates and currency fluctuations. We believe that interest rates may remain higher for longer, and aggregate valuations in Asia Pacific ex-Japan look broadly fair. Some countries like India are expensive outliers while China is becoming cheaper. Despite pockets of opportunities, we expect the broader challenging macroeconomic environment to continue into 2024.
We believe that careful stock selection, underpinned by rigorous company research, can effectively mitigate risk and successfully capitalise on the beneficiaries of the region’s long-term growth.
What do you think could surprise markets in 2024, either positively or negatively?
The election of Donald Trump as the US President could prove to be a positive catalyst for global markets in general as he may enact more market-friendly policies such as fiscal stimulus and pressure the US Federal Reserve to ease monetary policy. However, there may be some pressure on China should further policies be targeted towards Chinese industries.
On the negative side, there could be upward pressure on long-term US bond yields should the economy exhibit signs of weakening. Also, ongoing geopolitical tensions could impact the markets involved.
Within your portfolio, what has worked well in 2023?
In 2023, the Fund’s information technology holdings contributed to returns. Signs of a cyclical turnaround alongside attractive long-term growth opportunities meant semiconductor names such as SK Hynix (memory), Media Tek (integrated circuit design) and ASML (lithography) posted solid returns amid a volatile market. Furthermore, the Fund’s position in AIA contributed after a strong post-COVID-19 rebound.
What themes, sectors or regions would offer opportunities and potential risks?
Two sectors appear interesting:
- Defence: Countries are likely to continue increasing spending as a percentage of GDP for many years to come, which can support defence-related stocks globally.
- Memory within the technology sector: Material supply cuts have been supportive, demand for smartphones and personal computers is closer to trough, and we are seeing earlier signs of improved pricing. This could be a positive catalyst for tech-heavy markets like Korea.
A potential risk is the continued depreciation of the Chinese yuan, as the Chinese authorities consider this a stimulatory measure for economic growth.