Indian, Chinese stocks favored over Japan in Asia’s second half

Equities in China and India are being touted as potential outperformers in Asia in the second half of the year as investors flock to emerging-market themes.

About a third of 19 Asia-based strategists and fund managers surveyed informally by Bloomberg News said they see Chinese stocks outstripping most over the next six months. A similar number picked India as their top bet while Japan was a distant third.

Anticipated Federal Reserve interest-rate cuts are seen acting as tailwinds for the two emerging markets, each of which offers its own unique narratives, too. Survey respondents preferred Chinese stocks for their low valuations and expected policy changes, while favoring Indian shares for their post-election optimism and relative immunity to geopolitical tensions.

Asia Stocks

“We believe valuation discounts and broadening global growth present an opportunity for EMs, particularly in Asia, to lead in the second half of the year,” Joseph Little, global chief strategist at HSBC Asset Management, wrote in his midyear outlook.

EM stocks in the region are already on a roll. The MSCI EM Asia Index outperformed the broader MSCI Asia gauge by the most since 2009 in the last quarter. EM Asia was also the most notionally net bought region in June, according to Goldman Sachs Group Inc.’s prime brokerage desk — while global equities were net sold at the fastest pace in two years.

Indian equities have extended their rally since Prime Minister Narendra Modi’s ruling party secured sufficient support from key allies to form a coalition government, giving the leader a third straight term in power. The nation’s stock-market value exceeded $5 trillion for the first time in June as Modi committed to policy continuity and foreign investors returned to the market after two months.

A separate Bloomberg survey about India showed that the rally in the country’s equities has the potential to accelerate into year-end as investors remain confident of corporate profit growth and the upcoming federal budget may provide a further boost for areas such as consumer spending and infrastructure.

Asia Stocks

Ray Sharma-Ong, head of multi-asset investment solutions for Southeast Asia at abrdn Plc, favors Indian equities as “multiple catalysts yet to be priced in,” including the government’s budget. He also sees Indian stocks as “most sheltered from US-China tensions and spillover effects from the US presidential election.”

Chinese stocks, on the other hand, have been struggling after a strong rally earlier in the year, with some key gauges entering a technical correction in recent weeks. However, both the broad survey and a separate China-focused one by Bloomberg found analysts and money managers to be upbeat on the world’s second-biggest stock market for the next six months as global funds return and corporate earnings improve.

HSBC Holdings Plc is bullish on China, expecting the “very negative sentiment in Chinese equities to slowly turn,” according to Asia equity strategist Herald van der Linde. He is adding positions for the second half given “slow improvements in Chinese activity.”

The broad survey also flagged that geopolitical tensions stemming from the upcoming US-election are a key risk for Asia’s market. More restrictive policies could come as US President Joe Biden and former President Donald Trump battle to show their stance toward China.

“The impact of the escalated tension between China-US or China-Taiwan will be region-wide” said Hebe Chen, an analyst at IG Markets Ltd. “No Asian market is immune, particularly the best performing markets today.”

Over half of the respondents said Asian equities are likely to outperform their US counterparts through the end of 2024, citing Fed rate cuts and cheap valuations. However, most of them see the gains limited to 10% or less.

“Asia has the potential to outperform in a Fed cutting cycle,” Sharma-Ong said. “In addition to policy rate cuts, we get higher economic growth and earnings potential in Asia, equity valuations at cheaper levels, and currencies at higher carry relative to the dollar.”