As we wrap up the third quarter of 2024, the Asian market landscape continues to evolve with notable shifts that present both challenges and opportunities. This month, we observe a dynamic interplay between macroeconomic policies and fiscal measures that are driving market performance across the region. In this report, we also highlight some of our top stock ideas, showcasing companies that are strategically positioned to thrive in the current environment. Finally, our team has been actively conducting research trips throughout Asia, gathering invaluable insights as they kick the tires on potential investments. We are thrilled to present you with our insights. Enjoy.
The MSCI All Country Asia Ex-Japan Index was up 8.47% (in USD terms1) over the month of September, buoyed by the first round of interest rate cuts by the US Federal Reserve (the Fed) and the long-awaited stimulus measures from China’s central government. Relative to the rest of the region, China and Hong Kong were the leading outperformers, while South Korea and Indonesia were the worst performers. Sector-wise, Consumer Discretionary and Communication Services were the top performers, while Energy and IT were the relative underperformers.
MSCI China and Hong Kong were the leading performers in September, returning +23.9% and +17.1%, respectively. The end-of-month boost was driven by the Chinese government’s new economic stimulus measures, which included the lowering of key interest rates, mortgage rates, and down payments, and the creation of a RMB 500 billion (~US$70 billion) swap facility for financial institutions to invest in stocks.2 Investors turned even more bullish following the announcement of increased fiscal spending during the September Politburo meeting. In terms of macro data, China’s official manufacturing Purchasing Managers’ Index (PMI) remained contractionary for the fifth consecutive month but nudged up slightly to 49.8 in September.3 CPI inflation edged higher to 0.6% y/y in August (vs 0.5% y/y in July) as food prices turned positive for the first time in 14 months. However, non-food inflation continued to show signs of weakness due to the effect of a weak property market and consumer confidence.
MSCI India gained 2.1% in September but underperformed peers, with drags mainly from the Energy and IT sectors. The NIFTY continued to reach all-time highs throughout the month, exceeding 26,200 levels before tapering as the market shifted its focus towards China. Growth in India’s manufacturing industry remained in expansionary territory, but PMI cooled to an eight-month low of 56.5 in September (vs 57.5 in August) as factory production and sales both saw slower growth.4 Similarly, India’s services sector continued to see historically strong rates of expansion in September, but services PMI tempered to a lower rate of 57.7 (vs 60.9 in August5). Headline inflation rose slightly to 3.65% y/y in August (vs 3.54% y/y in July) but remained below the RBI’s target of 4.0% for the second consecutive month.
Korea was again the region’s laggard this month, with equities returning -2.9%. Foreigners net sold US$6 billion worth of KOSPI-listed stocks in September, marking the largest monthly net outflow since May 2021. The outflows were largely concentrated in the tech space amid peak memory cycle concerns and were intensified by the fresh rotations out of Korea back into China and Hong Kong. The Korea Exchange (KRX) unveiled the highly anticipated Korea Value-up Index on September 24, with 100 constituents selected based on criteria such as profitability and shareholder returns. The announcement was met with mixed investor feedback over the composition of the index but is recognized as a step to address the Korean discount phenomenon.
The ASEAN region saw mixed performance in September as market inflows reversed course with the China pivot. Thailand was the only outperforming country across the region, returning +11.6% for the month, thanks to the government’s announcement to reactive the dormant Vayupak Fund. The state investment fund is set to begin investing on October 1st, offering public subscriptions with guaranteed annual returns of 3-9% over a 10-year period. On the flip side, Indonesia was the region’s underperformer this month, with equities returning +1.1%. Indonesia is the first country amongst its peers to lower interest rates, announcing a 25bp cut in the policy rate to 6.0% one day before the US Federal Reserve’s announcement.
Previously, despite our view of a soft landing for the US economy, we anticipated that markets would experience a near-term air pocket due to slowing money supply growth and high real interest rates across key geographies. However, two significant pivots over the past month have reshaped the market landscape with greater optimism:
From a portfolio perspective, we’re not expecting China to return to the 10-12% nominal GDP growth of the past decade; but growth in the 4%–6% range will be more likely. Consequently, we are focusing on companies that can perform well in a slower growth environment, particularly in two key areas:
India: Steady underpinnings amid market consolidation
In India, the economic momentum has shown signs of slowing. While markets have performed well over the past quarters, we expect some near-term consolidation as investor attention shifts toward China. Consequently, our portfolio remains largely unchanged, maintaining long positions in sectors poised to benefit from ongoing consumption shifts, industrial growth, and strong financials.
Our recent travels across India have provided valuable ground-level insights. Corporate confidence remains high, even as consumer confidence exhibits signs of softening. Consumers are increasingly venturing into new categories such as concerts, travel, and other discretionary spending areas that were previously limited. After nearly 15 years, we are witnessing plans for significant capacity expansion in the infrastructure space by the Indian private sector. Notable projects include JSW’s 2.4x port capacity increase to 400 MTPA and Adani Green’s 4.5x expansion of renewable capacity to 50GW by 2030.7 Private sector capex revival while the government pivots toward higher social spending should bode well for well-balanced growth.
Concurrently, large business groups are exploring diversification into new verticals, reflecting a strategic pivot to enhance business resilience and capture emerging opportunities. A notable example is Aditya Birla Group, which is committing a US$20 billion investment run rate across its traditional sectors —cement and finance— as well as new areas such as property, paints, and retail.8 Although scaling these opportunities takes time, they contribute significantly to India’s long-term secular growth narrative. Another interesting insight is that because of the buoyant capital markets, several private companies, including subsidiaries of multinationals like Hyundai Motors and LG Electronics, as well as new-age internet companies, are pursuing a local listing over the next 12-18 months. In the near term, this may increase the paper supply, but from a medium-term perspective, it provides investors with opportunities to participate in differentiated growth stories.
Korea: Value-up theme continues
Korea’s corporate value-up program (CVP) remains a significant theme of focus. The newly launched Value-Up Index will facilitate retail investor participation in the CVP theme. While noise following KRX’s index announcement has centered around the selection of index constituents, the true impact lies in broad-based retail engagement, fostering wider ownership and support for the CVP initiatives.
Additionally, certain sectors in Korea are experiencing a sentiment boost from China’s stimulus measures. Consumer-focused industries, for example cosmetics, are benefiting from increased demand and favorable market conditions. We continue to monitor these developments closely, identifying opportunities within sectors that exhibit strong growth potential and resilience.
Taiwan: AI adoption here to stay
In Taiwan, the anticipated benefits from AI adoption are materializing gradually. Although real AI-driven growth has faced delays, recent developments indicate a positive trend toward mainstream integration. Companies are leveraging AI to gain a competitive edge by enhancing consumer connections and optimizing operations. For instance, Puma’s adoption of generative AI through Google Cloud’s Imagen 2 model exemplifies how businesses are utilizing AI for hyper-personalized marketing. These advancements are driving demand for advanced semiconductor chips, and Taiwan remains positioned as a critical player in this technology ecosystem. The latest quarterly commentary from Taiwanese suppliers points to a broadening of Nvidia’s chip demand from a handful of hyperscalers to top 100 corporates and governments.
ASEAN: Reaping the benefits of regional stimulus and trade dynamics
ASEAN economies stand to benefit from both US interest rate cuts and spillover effects from China’s stimulus measures. China, being one of ASEAN’s largest trading partners, is expected to boost demand for key imports from the region. In 2022, ASEAN countries exported goods worth approximately US$291 billion to China across various sectors, including raw materials, intermediate goods, and high-tech components.9 Furthermore, we anticipate a resurgence in tourism within ASEAN, particularly in Vietnam and Thailand, which historically received the highest proportion of Chinese tourists pre-pandemic. Domestically, although consumer sentiment has been constrained by inflation and higher interest rates, the easing of these pressures will likely result in disproportionately positive impacts for ASEAN consumers and businesses.
Falling oil prices, a boon for Asia
A notable development in the energy sector is the decline in oil prices, which have stabilized around the US$75 per barrel mark as of September. As Asia remains a net consumer of oil, falling prices are expected to generate consumer surplus and contribute to a reduction in inflationary pressures. Saudi Arabia’s plans to unwind long-standing production cuts and increase oil production will further support this trend, leading to lower commodity prices and easing inflation across the region.
Overall, the convergence of the US Fed’s interest rate cuts, proactive measures by China, and declining oil prices collectively create a favorable macroeconomic environment for Asian markets. These factors, coupled with our strategic focus on companies with quality earnings growth potential, position us well to capitalize on the welcome market shifts.
Our investment team brings you firsthand observations and key takeaways from their recent travels and engagements across Asia. Here’s what we’ve discovered.
Improvement in Vietnam’s real estate demand should ease banking sector struggles: Real estate prices have surged by over 20% year-over-year in Vietnam, driven by government-imposed restrictions on new project launches and a surge in demand. The banking sector, which has struggled because of subdued real estate for the last 2-3 years, should see lower asset quality issues in the future. The higher real estate prices are reflected in improved consumer sentiment in July and August, suggesting a potential uptick in consumer spending and economic resilience.
Taiwan – AI boom amidst traditional tech headwinds: Our recent research trip to Taiwan provided valuable insights into the dynamic landscape of the tech industry, particularly in the context of AI and traditional tech segments. The overall sentiment echoes our observations that while traditional tech markets remain subdued, AI-related demand continues to show robust growth. Companies across the supply chain, from cooling solution providers to power supply specialists, are vying for a position in the burgeoning AI hardware market. This AI focus is balanced by cautious optimism in traditional segments, with some firms positioning for a potential rebound in mainstream tech demand. Overall, the Taiwanese tech sector is demonstrating adaptability, leveraging AI growth while preparing for a possible resurgence in conventional tech markets.
India – Robust discretionary demand: Our India analysts recently experienced firsthand the overwhelming demand for live concert tickets in Mumbai. Coldplay’s concert sold out within 30 minutes as 13 million Indians competed for 150,000 tickets, despite prices reaching up to US$400. The surge caused the online ticketing platform to crash, and some tickets were later resold through unauthorized channels at 5-10x their original price. Similarly, a concert featuring Dua Lipa and a local favorite, Diljit Dosanjh, sold 100,000 tickets in under 15 minutes. This surge in discretionary spending is driven by rising per capita income and is fueling growth not only in the entertainment industry but also in premium categories such as alcohol, durable goods, travel, cosmetics, and jewelry. Flights as we travelled across India were packed, airports were busy with state-of-the-art infrastructure, and discussions on stock markets were commonly heard.
As discretionary consumption continues to expand, we are only beginning to tap into this strong theme, which is set to drive growth over the next decade.
Here are some recent photos we took at the Sardar Vallabhbhai Patel International Airport in Ahmedabad – a tier 1 city in India. This airport has undergone significant upgrades, transforming it into a modern, passenger-centric hub that mirrors the amenities and retail experiences found in leading international airports. These enhancements focus particularly on consumption and the introduction of premium consumer stores, signaling a shift towards catering to India’s growing aspirational middle class.
Each quarter, we highlight a select number of companies that showcase exceptional growth potential. These stocks on our conviction list represent opportunities we believe will deliver substantial value over the coming years. Here are the standout stocks we’re featuring this quarter.
Proya Cosmetics
Proya is a leading Chinese skincare and cosmetics company known for its affordable quality products. The company predominantly targets the mass segment, with most of its sales coming from online channels, including Tmall and Douyin. Proya’s revenues have grown 33% CAGR over the last three years, reaching RMB 8.8 billion (~US$1.3 billion) in FY23.10
China’s cosmetics industry, valued at approximately RMB 400 billion (~US$60 billion) and growing at a steady 5% CAGR,11 is undergoing a notable transformation as domestic brands increasingly capture market share from their foreign counterparts. This shift is fueled by Chinese consumers’ growing acceptance of local brands and a broader trend of downtrading, where consumers seek high-quality yet affordable products to maximize value. We believe Proya is exceptionally well-positioned to benefit from these evolving trends. The company has established a robust brand presence across China, supported by an extensive distribution network and strategic partnerships with major retailers and leading e-commerce platforms. Furthermore, Proya’s ability to swiftly adapt to market trends and changing consumer preferences reinforces its competitive edge in the dynamic and rapidly growing beauty industry.
Proya’s market share in China has doubled to 3.2% over the past decade.12 However, the top players in China’s market have market shares as high as 18%, meaning Proya still has significant room for growth as it continues to take share from foreign players. With Proya’s brands now reaching critical mass and trust with consumers, we believe that the company will be able to sustain its high growth rates over the next 3-5 years while maintaining margins at a steady level.
Hansoh Pharmaceutical Group
Founded in 1995, Hansoh is a leading Chinese pharmaceutical company specializing in R&D, manufacturing, and commercialization of innovative drugs. The company’s portfolio consists of four major sectors: oncology, anti-infection, central nervous system (CNS) diseases, and metabolic diseases (including autoimmune diseases). Through a series of innovative drug launches in recent years, Hansoh successfully transformed its business from a pure-play generics company to a 65% innovative mix in less than five years, representing the highest innovative contribution among top Chinese pharmaceutical companies.13
We have been closely monitoring Hansoh Pharma since its IPO in 2019, recognizing that the company’s transformation would take time to materialize. This swift transition highlights Hansoh’s robust R&D capabilities, demonstrated by nearly doubling its R&D spending to 22% of revenue over the past five years.14 By the end of 2023, Hansoh was conducting more than 50 clinical trials, encompassing over 30 innovative drug candidates. Looking forward, the company aims to advance 8-10 new molecules to the clinical development stage annually, further strengthening its dynamic and expansive product pipeline.
In terms of outlook, the company’s existing product portfolio, including promising treatments like GLP-1 for diabetes and the autoimmune therapy inebilizumab, positions it well to capitalize on growing demand in these high-growth segments. Additionally, Hansoh has developed a cutting-edge antibody-drug conjugate (ADC) technology platform and a unique combination of a third-generation EGFR-TKI and an EGFR/c-MET bispecific antibody, underscoring its innovative edge. On the operational front, improving efficiencies with a declining SG&A-to-sales ratio is set to enhance earnings margins, driving profitability and supporting sustained long-term growth in the coming years.
IHH Healthcare
IHH Healthcare is a leading integrated healthcare service provider with dominant market positions in its core regions of Singapore, Malaysia, and Turkey. Expanding its global footprint, IHH also operates and invests in healthcare facilities across China, India, Hong Kong, and Europe. The company boasts more than 12,000 licensed beds distributed across over 80 hospitals, offering a comprehensive range of medical services from general healthcare to specialized treatments.15
IHH is set to significantly expand its capacity, planning to add approximately 33% more beds over the next three years—totaling around 4,000 new beds by 2026-27.16 Additionally, the company has maintained strict cost control by leveraging synergies from its scale and mitigating the impacts of inflation and rising interest rates. IHH is focused on driving efficiencies and optimizing its portfolio by divesting underperforming assets to enhance overall returns.
IHH’s consolidated ROE has improved from an annual average of 3-4% between 2018 and 2020 to approximately 5% in 2023.17 This improvement is driven by a turnaround in previously loss-making segments, particularly Acibadem and operations in India, which had been unprofitable until 2020. We anticipate further ROE enhancements as IHH continues to build capacity, expand its specialized medical services, increase productivity, and refine its portfolio for better returns. These strategic initiatives are expected to drive sustained profitability and support long-term growth over the next three to five years.
For sophisticated investors only. For informational purposes only. The information presented in the material is not, and may not be relied on in any manner as legal, tax, investment, accounting or other advice or as an offer to sell or a solicitation of an offer to buy an interest in any investment product or any other entity sponsored or managed by Shikhara Investment Management. This material doesn’t constitute and should not be considered as any form of financial opinion or recommendation.
Shikhara Investment Management LP is currently an Exempt Reporting Adviser that is exempt from registration as an investment adviser with the U.S. Securities and Exchange Commission. This material is prepared by Shikhara Investment Management LP (“Shikhara”). This material does not constitute an offer to sell or the solicitation of an offer to buy in any state of the United States or other U.S. or non-U.S. jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such state or jurisdiction.
Investment involves risk. Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the investment product will generate a return and there may be circumstances where no return is generated. Investors could lose all or a substantial portion of any investment made. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the investment product and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Shikhara’s investment products are suitable only for sophisticated investors and require the financial ability and willingness to accept the high risks and lack of liquidity inherent in Shikhara’s investment products. Prospective investors must be prepared to bear such risks for an indefinite period of time. No assurance can be given that the investment objectives of any given investment product will be achieved or that investors will receive a return of their investment.
Certain of the information contained in this material are statements of future expectations and other forward-looking statements. Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance or events may differ materially from those in such statements.
Certain information contained in this material is compiled from third-party sources. Whereas Shikhara has, to the best of its endeavor, ensured that such, information is accurate, complete and up-to-date, and has taken care in accurately reproducing the information, Shikhara takes no responsibility for the accidental publication of incorrect information, nor for investment decisions taken based on this material. Neither Shikhara nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and nothing contained herein should be relied upon as a promise or representation as to past or future performance of any investment product or any other entity.
The contents of this material are prepared and maintained by Shikhara and has not been reviewed by the Securities and Exchange Commission of the United States.
The fund managed by Shikhara holds the securities mentioned under the “Quarterly Conviction Calls” section of the article.
This website is published exclusively for the purpose of providing general information about the management services carried out by Shikhara Investment Management LP, Shikhara Capital (Hong Kong) Private Limited and its affiliates (collectively “Shikhara Investment Management” or “Shikhara”). The information presented on the website is not, and may not be relied on in any manner as legal, tax, investment, accounting, or other advice or as an offer to sell or a solicitation of an offer to buy an interest in any investment product or any other entity sponsored or managed by Shikhara Investment Management. This website doesn’t constitute and should not be considered as any form of financial opinion or recommendation.
Shikhara Investment Management LP is currently an Exempt Reporting Adviser that is exempt from registration as an investment adviser with the U.S. Securities and Exchange Commission and Shikhara Capital (Hong Kong) Private Limited has been approved by the Hong Kong Securities and Futures Commission. This website does not constitute an offer to sell or the solicitation of an offer to buy in any state of the United States or other U.S. or non-U.S. jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such state or jurisdiction.
Investment involves risk. Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the investment product will generate a return and there may be circumstances where no return is generated. Investors could lose all or a substantial portion of any investment made. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the investment product and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Shikhara’s investment products are suitable only for sophisticated investors and require the financial ability and willingness to accept the high risks and lack of liquidity inherent in Shikhara’s investment products. Prospective investors must be prepared to bear such risks for an indefinite period of time. No assurance can be given that the investment objectives of any given investment product will be achieved or that investors will receive a return of their investment.
Certain of the information contained in this website are statements of future expectations and other forward-looking statements. Views, opinions, and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance, or events may differ materially from those in such statements.
Certain information contained in this website is compiled from third-party sources. Whereas Shikhara Investment Management has, to the best of its endeavor, ensured that such information is accurate, complete, and up-to-date, and has taken care in accurately reproducing the information, Shikhara Investment Management takes no responsibility for the accidental publication of incorrect information, nor for investment decisions taken based on this website. Neither Shikhara Investment Management nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and nothing contained herein should be relied upon as a promise or representation as to past or future performance of any investment product or any other entity.
The contents of this website are prepared and maintained by Shikhara Investment Management and has not been reviewed by the Securities and Exchange Commission of the United States or the Securities and Futures Commission of Hong Kong.