By Fiona Yang and Ian Hargreaves, co-managers of Invesco Asia Trust
Most client meetings we have these days include a discussion on why we are overweight China and underweight India. Given our contrarian approach, the positioning in itself is unsurprising. What is extraordinary is the degree of divergence in performance we’ve seen between these two countries, with China down 12% over the last year, and India up 35%.
India’s continued momentum relative to peers has seen it narrow the gap to China and Taiwan as the first- and second-largest emerging markets by market capitalisation.
On Friday, MSCI will remove 60 stocks from its flagship MSCI China Index, bringing the number of Chinese stocks removed from the MSCI Global Standard indices to nearly 200 in 2024 alone.
Despite their contrasting recent fortunes, we have maintained our underweight India and slightly overweight China allocation. As value-focused investors, this contrarian positioning is due to our conviction that China and other overlooked Asian markets simply present stronger valuation opportunities.
India – a macro sweet spot
India appears to be in a macro sweet spot, with a bull market supported by a strong capital expenditure cycle and robust domestic demand. Our Indian holdings have generally performed very well, but we have now sold outperformers like Aurobindo Pharma, Larsen & Toubro and Mahindra & Mahindra, with valuations appearing increasingly full and implying long term growth rates we struggle to justify.
For valuation-focused investors, the challenge has been to find new ideas that appear undervalued. The Indian market is trading at 4.0x Price-to-book ratio, a level last breached nearly two decades ago, at a time when other Asian markets attracted a similar premium. As our increased underweight position in India suggests, we have been finding more attractive opportunities elsewhere.
China – overlooked green shoots
Pessimism around China has appeared to become entrenched. Faltering demand in the property market, weak consumer confidence, and a perception that the policy response to market weakness in late 2023 was underwhelming has left many investors factoring in little chance of a recovery.
Our view has not changed, and the portfolio continues to maintain a slight overweight position in China and Hong Kong. We believe much of this negative investor sentiment stems from overlooking abundant household savings and solid balance sheets, with recent policy announcements also suggesting a greater urgency to boost confidence and support growth. Should attitudes towards China start to see an improvement, they will be doing so from a low starting point, with deeply discounted equity valuations likely to be very sensitive to signs that corporate fundamentals are starting to improve.
Geopolitical tensions linger, but we have seen signs of stabilisation in the economy and policy support measures that signal a more determined attempt to support the property market.
Outlook for Asia
Overall, Asian equity index valuations are trading well below long-term historic averages, and at a significant discount to developed markets, particularly the US. We believe there is scope for this discount to narrow.
Asian economies enjoy relatively solid fundamentals, with room to ease policy as we approach the start of a monetary easing cycle, with US dollar strength likely to cease being a headwind. Although concerns over the risk of US recession have been climbing, Asia’s growth prospects continue to compare favourably, with consensus earnings growth expectations of around 25% for 2024 and 15% for 2025. We believe that companies operating in Asian economies may see less earnings vulnerability from a global slowdown relative to what is being implied in valuations, although India appears to be an exception given already elevated expectations.
Investors need to consider many things when investing in Asia or emerging markets. While becoming hotbeds of consumption and innovation following decades of rapid industrialisation, investors must still be mindful of geopolitical risks and the global economic cycle. But with these economies enjoying stronger fundamentals, liquidity conditions set to improve, and governments across the wider region getting behind industry with pro-growth reforms and supportive measures, we believe Asia and emerging markets have some of the most exciting investment opportunities in the world.
