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Horizons: Bright spots in Asia – Japan, India and South Korea equities

7 May 2024

During China’s National People’s Congress in March, the authorities showed their determination to support the economy and the property market. However, in the absence of large-scale stimulus policies, China and Hong Kong equities have shown signs of bottoming out. Their outlook may depend on the scale of future stimulus policies and the development of the domestic property market. For investors, instead of waiting for the China and Hong Kong stock markets to rebound, it might be better to diversify and seek opportunities in other Asian countries, like Japan, India and South Korea.

Three key factors may continue to support Japanese equities

The Bank of Japan (BoJ) raised interest rates in March as expected, but the policy dovish stance sent Japanese equities higher. In fact, the Nikkei Index has risen by 13% YTD and once surpassed its record high in 1989. HSBC believes the following three factors may continue to support Japanese equities: 

  1. Listed company reforms to improve shareholder returns. The Tokyo Stock Exchange announced in January that listed companies are required to disclose on a monthly basis their plans to improve capital efficiency. This measure may force them to increase share buybacks or dividends, which may be positive for stock prices and improve shareholder returns.
  2. New policies to attract stock trading. In January, the Japanese government unveiled a Nippon Individual Savings Account (NISA) programme, which exempts retail investors from paying capital gains tax on their holdings. According to the BoJ, Japanese households hold about 7.7 trillion yen in cash and deposits, and their equity holdings account for only 13% of their assets, well below the 40% in the US and 21% in Europe. It is estimated that the new measure will bring about 5 trillion to 9 trillion yen of additional funds over the next five years, which may be supportive for Japanese equities
  3. Improving fundamentals. Japan inflation was very low in the past, and so it was difficult for companies to raise prices even in the face of high input costs. As inflation finally climbs back to the central bank's 2% target, companies are now able to pass on higher costs to consumers. Furthermore, Rengo, Japan's largest union, announced that large companies have agreed to raise wages by 5.28% this year, the highest in 33 years. Faster wage growth may provide a boost to consumption and corporate earnings.

Due to these factors, HSBC expects earnings per share of Japanese companies to increase by 9.9% YoY, and therefore we stay overweight on Japanese equities.

Indian equities may benefit from strong fundamentals

The Indian Manufacturing Purchasing Managers' Index (PMI) stayed at a 16-year high of 59.1 in April. Its underlying indices retreated but were still in expansion zone. The Services PMI rose further to 61.7 in April and its composite new export orders gained at the fastest pace since September 2014, indicating strong confidence in the economic outlook.

Looking ahead, HSBC has raised its GDP growth forecast for India from 6% to 6.3% this year and from 6.3% to 6.6% next year in anticipation of higher government capex and fixed asset investment related to renewable energy, AI and semiconductors.

In the longer term, HSBC believes India is undergoing an industrial renaissance, driven by high-tech services, digital start-ups and services exports. In addition, many multinational companies are willing to build outsourcing centres to support HR, audit, R&D and legal functions, which may lead to an increase in exports from the service sector, supporting India’s potential growth to reach 6.5% YoY over the next 10 years, above the 6% average before the pandemic. Although the general elections in mid-April to early-June may lead to temporary volatility, HSBC remains overweight on Indian equities due to the upbeat economic outlook.

The expectation of strong demand for semiconductors may boost South Korea's exports

South Korea’s exports YoY in March slowed from 4.1% to 3.1%, of which preliminary semiconductor exports YoY fell to 35.7% from 66.7% in February, mainly due to the high base effect.

The recovery of global demand for electronic products has stalled which may limit the upside of semiconductor exports. However, in the long run, AI has already become a trend of the future and according to a WTO report last year, South Korea's memory chip production in 2019 accounted for 40% of the world's output. The construction of AI and related hardware products will drive the demand for memory chips higher. In addition, as stimulus measures from China may soon take effect and the European economy is bottoming out, global exports are likely to rise by 2.5% this year from a 0.5% decline last year, and accelerate to 3.4% next year. HSBC favours South Korea equities on expectations of further gains in semiconductor exports.

Since we see upside potential in Japan, India and South Korea equities, and since Hong Kong and China equities may have bottomed out already, HSBC also favours Asian equities. If investors have concerns about individual countries, they may consider diversifying their investments across the Asian region to avoid concentrating in a single market.

Source: HSBC, Bloomberg, data as of 29 April 2024.

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