What were the major recent events and impacts on your asset class?
In the second quarter, we saw that the MSCI Asia ex-Japan Index went down 1% and this was mainly dragged by the Chinese market. Korea, Taiwan and Indian markets all performed quite well following the good performance of global markets. But sentiment was very weak in China leading to underperformance of Chinese equity. So, what is holding back the Chinese equities? We see a confidence trap when it comes to investor sentiment related to China equity. Investor sentiment has been very low due to a number of reasons, including weakening momentum of the economic growth recovery, the drag from the real estate sector as well as the US-China tension. And in addition to that, the policy stimulus has so far been underwhelming for a lot of investors, as we believe that the Chinese government is trying to balance supporting the short-term economy against not creating problems over the longer term. And additionally, every time the sentiment is weak in China, investors also tend to bring up the issues such as long-term structural problems related to aging populations. So because of these factors, investors are not in a hurry to get back into China equity.
What can your asset class offer in the current environment?
So when we look at MSCI China and MSCI Asia ex-Japan from a historical perspective, we see that both indexes are at very low levels compared to their historical trend line. Valuations are also very low. When we look at the International Monetary Fund (IMF) data, it shows that this year 70% of the global growth will come from Asia. Out of that, China will contribute to about a third of the global growth, India 15% and the rest from other Asian economies. So when we look at the absolute scale, China and Asia remain a key driver for global economic growth. And a lot of people have been disappointed about China economic recovery. But we need to put things into perspective. We're talking about Chinese GDP this year growing, whether it's 5% or 4% or 6%. But it's still one of the fastest growing economies among all the major economies. And we see opportunities in many areas in Asia and China. In clean energy we have seen a lot of stock correction in the recent 12 months that has led to increasingly attractive valuations. The China reopening theme continues to play out, especially for companies related to travel. And the technology cycle is also bottoming out thanks to the very timely catalyst of the artificial intelligence (AI) computing. And finally, we also have structural reform opportunities in Chinese state-owned enterprises. These companies are a major source for pension funding for China. The government has communicated the goal to increase the valuation for these companies and currently many of them trade below book value.
What is your outlook in the near and medium term?
Looking at investor flows, we see that Asia in general is very much oversold. China is underweight in many global portfolios. For the rest of Asia, according to Goldman Sachs data, since the peak in 2021, more than USD 100 billion has been pulled out of Asia ex-China equity markets. And since the bottom of the market and during the rebound, we saw that global investors put back around USD 30 billion. So there is still a lot of room for foreign buying. And looking at the Chinese policy, the policy has the nature of countercyclical. So because of that, we expect the Chinese government to roll out more supportive policies, particularly related to consumption and property market, in order to support the economic recovery. And this will provide a much needed factor to help China break out of the confidence trap. And another important driver is earnings growth. We have seen quite good earnings numbers coming out of the MSCI China universe in the first quarter. And when we look at monthly earnings revisions numbers in May, earnings revisions turned positive for many sectors in China. So this year, when we look at earnings growth estimate, we should see mid-teens earnings growth in China. So that will be an important driver for Chinese equity. And finally, the AI growth is creating a very good sentiment for Asian tech supply chain. So when we look at Asian tech space, AI will bring incremental revenue in areas related to cloud service, AI servers and semiconductors. And additionally some leading Asian Internet companies are launching their own large language based models. Although in the short term, AI is not likely to generate significant incremental revenue for Asian tech, it is prompting investors to take another look at these names.
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