Asia’s changing market mix
How Asia is proving to be much more than just China, and current valuations offer a compelling entry point for equity investors.
6th August 2024 14:09
by James Thom from abrdn
In Asia, the investment opportunity is rapidly evolving.
It’s remarkable that as recently as 2020, China made up almost 40% of the regional benchmarks. Today, it’s just 24%. In its place, we’ve seen India’s contribution double in just four years from 9% to 18% today. Meanwhile, the tech-heavy Taiwan market has risen from 12% to 19% over the same period.
These changes reflect the region’s shifting economic landscape (Chart 1). India is rising as an economic superpower, as the growth balance tilts increasingly away from China.
Chart 1. MSCI All Country Asia-Pacific ex-Japan Index’s country weightings (2020 to present)
Source: abrdn Investments, MSCI, July 2024.
Southeast Asia also benefits from China’s geopolitical woes, as global companies seek to diversify supply chains. At the same time, artificial intelligence (AI) is sparking a boom in Asia’s world-leading semiconductor industry (Chart 2). These developments underscore Asia's critical role in driving global innovation and economic growth, creating abundant investor opportunities.
Chart 2. MSCI All Country Asia-Pacific ex-Japan Index’s sector weightings (2020 to present)
Source: abrdn Investments, MSCI, July 2024.
Investor concerns over China have tarnished Asian markets. However, this overlooks the excellent progress the broader region has made in recent years in strengthening its economies, shoring up its currencies, creating employment, adopting technology, and driving innovation. Today, little of this is priced into markets with the MSCI All Country Asia-Pacific ex-Japan (MXAPJ) Index trading at a discount to the US and wider world. [1]
India’s index position rising (at the expense of China)
China's economic rise since the 1980s has been remarkable, increasing its global economic share from 2% in 1990 to 18.4% in 2021. That said, since 2020, regulatory crackdowns, and economic challenges have led to market underperformance.
Chart 3. India’s year-on-year earnings growth
Source: CLSA, IBES, June 2024.
AI and tech boom benefiting Korea and Taiwan
Tech is eating the world, and Asia is the centre of global innovation. Regional companies are at the forefront of emerging technologies such as 5G, AI, and electric vehicles. We believe Asia’s tech hardware and semiconductor supply chain names are the real winners.
Taiwan and South Korea are at the cutting edge of the global technology boom, especially in semiconductors and AI. Both countries are key players in the global tech supply chain, benefiting from the increased demand for advanced technologies.
The region's tech supply chains are becoming more resilient and diversified, and investments in advanced manufacturing capabilities are strengthening Asia's competitive edge (Chart 4).
Chart 4. AI semiconductor demand by end-market
Source: Gartner, Morgan Stanley Research, June 2024.
Shifting supply chains proving a boon for Southeast Asia
Southeast Asia is fast emerging as an attractive alternative manufacturing and sourcing destination, as multinational corporations seek to reduce their reliance on China and mitigate geopolitical risks. Two countries stand out. Vietnam is seeing foreign direct investments pour into higher technology sectors, especially automotive and electronics (Chart 5).
Chart 5. Apple suppliers based in Vietnam
Source: Apple, DBS, July 2024.
The other is Indonesia – the largest economy in Southeast Asia – which is doing well in leveraging its abundant natural resources and large domestic market to attract investment in various industries, including electric vehicle battery production.
Companies largely looking cheap
Asian equities are trading at a significant discount compared to global and US counterparts (Chart 6). The regional benchmark, the MXAPJ Index, is trading at just 17xPE, compared to 22xPE for the MSCI AC World Index and 26xPE for the US S&P 500 Index.[1,3,4,5]
Chart 6. Asia-Pacific large-cap discount relative to S&P 500
Source: abrdn Investments, Bloomberg, June 2024.
We believe this valuation gap – the cheapest in 10 years – presents an attractive entry point for investors seeking undervalued opportunities (Chart 7).
Chart 7. Asia small caps still cheap compared to US markets
Source: abrdn Investments, Bloomberg, June 2024.
Final thoughts
Asia offers a plethora of opportunities beyond China, underpinned by a dynamic India, AI innovation, the tech boom, and Southeast Asia’s growing role in shifting global supply chains. Understanding these positive structural themes is crucial for navigating the complex Asian market and identifying potential areas for growth and returns in the years ahead.
Current valuations present a compelling entry point for Asian equities. We believe investors who delay may miss out on the potential upside, as the market recognises these favourable conditions.
James Thom is senior investment director, Asian equities.
ii is an abrdn business.
abrdn is a global investment company that helps customers plan, save and invest for their future.
1 The MSCI All Country Asia-Pacific ex‐Japan (MXAPJ) Index is an unmanaged index considered representative of Pacific region stock markets, excluding Japan. The index is computed using the net return, which withholds applicable taxes for non‐resident investors.
2 "The world’s fastest-growing big economy is living up to its billing." CNN Business, February 2024. https://www.cnn.com/2024/02/29/economy/india-gdp-growth-economy/index.html.
3 Bloomberg, MSCI AC Asia-Pacific ex Japan Index (USD), July 2024. https://www.bloomberg.com/quote/BMAJRHK:HK.
4 The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. With 2,760 constituents, the index covers approximately 85% of the global investable equity opportunity set. DM countries include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK and the US. EM countries include: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
5 The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalisation.
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