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Outlook 2024: Jian Shi Cortesi (Asia/China Growth Equities)

Asia & China Growth Equities – An exciting market with mispriced opportunities

December 2023

Challenges and opportunities: Click here to read GAM's investment managers' Outlooks for 2024.

Asia: A growth story with low valuation

Asia offers a compelling combination of strong secular growth and low valuation, while China and other Asian countries remain the key drivers for global growth. According to International Monetary Fund (IMF) data, Asia will have contributed approximately 70% of global growth in 2023, and we expect this share to remain high in 2024. China is likely to achieve 4-5% GDP growth, with the support of all the policies rolled out in 2023.1 Taiwan and Korea should benefit from the recovery in the demand for semiconductors and some technology hardware. Meanwhile India should sustain its robust growth momentum, thanks to the expansion of its manufacturing sector.

Technology: A key growth area in Asia

One of the sectors that is driving the growth in Asia is technology. First, semiconductor-related industries are booming in China, as it aims to achieve self-reliance on semiconductors after the US-imposed restrictions on semiconductor sales to China. All related areas, from electronic design automation (EDA) software to foundry, are growing fast in China. Second, India and Southeast Asia are benefitting from technology supply chain relocations, particularly related to assembly. Third, Chinese internet players are increasingly targeting overseas markets in their pursuit of further growth beyond domestic markets. Examples of this are Temu (launched by PDD), Shopee (a Singapore-founded company backed by Tencent), Lazada (a subsidiary of Alibaba), TikTok (a subsidiary of ByteDance), and SHEIN (a private Chinese company). Southeast Asia has been an attractive market compared with the US, Europe or Latin America because of its greater growth potential and high consumer acceptance. The e-commerce retail sales volume in Southeast Asia witnessed fivefold growth from 2016 to 2021, according to McKinsey. We expect industry consolidation and strategy shifts towards profitable growth in the coming years.

China: A shift to high-value-added industries

Another factor that is shaping the growth in Asia is the transition of China from a real estate-driven economy to a more diversified and high-value-added one. Asia equities are undervalued, as they have suffered from excessive selling pressure. The MSCI Asia ex Japan Index is currently at the bottom of its historical range. Over the past three years, China has been the main drag on Asia equity performance, while other Asian markets have fared relatively better. The MSCI China Index has plunged almost 60% from the previous peak in 2021 (as of 31 October 2023). The Chinese economy is undergoing a major transition to reduce its dependence on real estate construction and to pivot towards high-value-added industries.

In 2024, we expect lacklustre property construction and the relocation of low-end manufacturing to cheaper countries will continue to weigh on economic growth. However, we believe speeding up the bankruptcy and asset liquidation process of the troubled developers will help the real estate market return to a healthy state. On the other hand, we believe the key drivers of economic growth in China in 2024 will include advanced manufacturing (such as aircraft and robotics), new energy equipment (such as solar), electric vehicles, consumption focusing on experience (such as travel), technology self-reliance (such as AI and semiconductors), as well as healthcare and biotech.

Given the counter-cyclical nature of Chinese policy, we believe the Chinese government will maintain the supportive policies next year to stabilise property sales and to support economic growth. Low inflation offers room to keep the expansionary monetary policies. We believe that economic growth will also be supported by fiscal spending on social housing and the domestic spill-over effect from the One Belt One Road initiatives.

A market with mispriced opportunities

Despite the challenges and uncertainties, we find the current market environment exciting with ample stock investing opportunities, especially in China. The MSCI China Index has lagged behind the economy and corporate earnings growth for 10 years. We believe the areas with the highest level of investor misconception offer the most interesting opportunities.

Many companies have delivered good earnings results, but some have so far been ignored by the market. We have seen some stocks react positively to earnings improvements, such as education companies. Many Asian companies have a large amount of cash and have announced share buyback plans. Large cash levels also enable dividend payout increases. Both could boost the stock prices.

We see opportunities in these areas:

  • The technology cycle is recovering in Asia, benefitting semiconductor and hardware manufacturers in Korea, China and Taiwan.
  • AI is emerging as a timely catalyst. AI-related names, such as Chinese internet companies with AI capabilities, are well-positioned for growth.
  • Secular growth in travel and education, including overseas test preparation and online travel platforms, is driven by the rising middle class and demand for quality experiences.
  • Electric vehicles and battery makers, where industry leaders have a competitive edge in the fast-growing market.
  • Secular growth in healthcare and the rise of biotech in Asia, including some of the leading pharmaceutical companies and contract development and manufacturing organisation (CDMO) names in India, Korea and China, is supported by the aging population, health awareness and biotechnology innovation.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. "The indices referenced herein are provided for illustrative purposes only, are unmanaged and do not incur management fees, transaction costs or other expenses associated with the Fund. Therefore, comparisons to indices have limitations."

This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

Jian Shi Cortesi

Investment Director
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