The MSCI All Country Asia Ex-Japan Index was up 3.18% (in USD terms1) over the month of August. Relative to the rest of the region, ASEAN countries outperformed, with Thailand and Malaysia leading the pack, while South Korea and India were the underperformers. Sector-wise, Health Care and Real Estate were the top performers, while Materials and Utilities were the relative underperformers.
MSCI China and Hong Kong outperformed in August, returning 3.47% and 6.46%, respectively. China’s local governments issued RMB 796.5 billion (US$112 billion) of special bonds in August, the highest monthly issuance YTD bringing the total issuance to RMB 2.57 trillion in 8M24.2 Local governments are still expected to sell RMB 1.3 trillion worth of notes for the rest of 2024 to support the rapid growth in infrastructure investment. China’s official manufacturing Purchasing Managers’ Index (PMI) slipped by 30bps to 49.1 in August due to weaker domestic demand and weather disruptions, marking the fourth consecutive month below 50.3 Service PMI improved 20bps to 50.2 on seasonally stronger summer travel, but was largely offset by continued weakness in capital market and property-related services.
Indian equities underperformed in August, returning 1.58%, with drags mainly from the Real Estate and Industrials sectors. India’s real GDP grew 6.7% y/y in the April to June quarter of Q1FY25. While this headline figure fell short of expectations, demand and investments remained robust, with private consumption growing by 12.4% y/y and investments also registering a healthy growth of 9.1% y/y. Meanwhile, government expenditures grew at a slower rate of 4.1% y/y, though this was likely due to the general election period. Headline inflation fell to a 5-year low of 3.54% y/y in July (down 154bps), driven by favorable base effects, while Core CPI inflation rose to a 6-month high of 3.35% y/y, predominantly due to the telecom price hike.
Korea was the region’s laggard this month, with equities posting a marginal decline of 0.10%. The KOSPI index struggled to recover its 2,700 threshold as stocks faced headwinds from broader macroeconomic risks and emerging concerns about a potential cyclical peak in the Asian AI supply chain. In Taiwan, semiconductor names also saw outflows from foreign investors in August, though the market recouped most of the sell-off to end +3.29% for the month.
ASEAN markets outperformed the region as foreigners net bought a total of US$2.4 billion in August alone (vs net outflow of -US$7.2 billion in 2023).4 Rotation to the region was most likely driven by expectations of US Federal Reserve (“US Fed”) interest rate cuts which would lead to lower pressure on local currencies. Thailand and Malaysia led the region’s outperformance, with equities returning 11.87% and 11.36%, respectively, for the month. In Thailand, markets performed well despite the political turmoil this month, which saw Prime Minister Srettha Thavisin removed by a court ruling and the appointment of Paetongtarn Shinawatra, daughter of former Prime Minister Thaksin, as his successor. Investors are cautiously watching for policy continuity, potential reforms, and the new leadership’s ability to navigate economic challenges and maintain investor confidence.
Our analysts attended key conferences in India and Korea this month, gathering valuable insights from company management across various sectors. The overall outlook is mixed but generally positive, with opportunities emerging from global supply chain shifts, regulatory changes, and domestic growth drivers.
Manufacturing shifts to India: There’s clear evidence of manufacturing shifting away from China, benefiting other Asian countries, particularly India. For example, in the carbon black industry, Chinese capacity reduction due to cost pressures is creating opportunities for Indian manufacturers. Similarly, in the wind energy sector, domestic Indian players are preferred over Chinese competitors for government projects. According to the management of a wind company we spoke with, the Indian wind sector outlook remains robust, driven by increasing renewable purchase obligations (from 29% in FY24 to 43% by FY30) and a recognition of wind’s role in complementing solar energy during peak hours.
India financial sector growth: India’s financial sector is showing promising growth, especially in affordable housing finance and small business lending. These companies are also leveraging technology to enhance efficiency and customer experience. For instance, one housing finance company reported using an in-house sales force platform and self-guided app to improve productivity and reduce turnaround time. The wealth management sector is also emerging as a growth area, particularly in the high net worth (HNI) and ultra-high net worth (UHNI) segments, with firms expanding their relationship manager capacity to meet the rising demand for wealth management services.
Korean manufacturing and corporate governance focus: Insights from the UBS Korea Conference and site visits reveal ample value-up and shareholder return improvement potential for Korean stocks, and these were often discussed in corporate meetings. Another key takeaway is that Korea’s strong manufacturing capabilities, particularly in cosmetics, power equipment, and shipbuilding, are attracting global attention. For example, US utilities and renewables companies are actively engaging Korean power equipment manufacturers to address supply tightness in the US market. Extended lead times are positively impacting Korean suppliers’ margins and revenue growth visibility.
These insights highlight the dynamic nature of Asian markets, with shifts in manufacturing, sector-specific developments, and improvements in corporate governance creating diverse investment opportunities across the region.
Global Macro: Navigating towards a soft landing
Following a volatile August, economic indicators suggest a softening in global markets. In the US, the cooling labor market, evidenced by the rise in jobless claims and reductions in temporary workforce, is likely to bolster the Federal Reserve’s confidence in initiating rate cuts from September. The hope here is that the Fed quickly moves towards a neutral monetary policy stance over the next 6-9 months.
Unlike the recessions of 2000 and 2008, today’s economy exhibits fewer imbalances. Real wages remain positive, and payrolls continue to grow, albeit at a slower pace, and we don’t see any large-scale excesses in key sectors as we did in past downturns. Thus, these factors support our view of a soft landing rather than a sharp and sustained downturn. This transition period may feel turbulent, and we anticipate markets will go through an air pocket as the economy decelerates from its trajectory. However, such dislocations also create investment opportunities.
China: Selective positioning in a transitioning market
In China, the current environment sees us identifying both long and short opportunities. On the short side, the ongoing consumption downgrade and deflationary pressures in China are exposing vulnerabilities in previously overvalued companies, particularly in certain consumer categories. We anticipate these firms may face challenges as consumer demand weakens. On the long side, we see significant potential, for example, in the Chinese healthcare sector. Over the past five years, many pharmaceutical companies have successfully transitioned from generics to innovative products, and we believe the market has yet to fully price in this evolution.
In general, our focus in China is on companies demonstrating margin resilience. With easing competition over recent quarters, leading companies are exhibiting pricing power, maintaining margins, and engaging in shareholder-friendly actions like buybacks and dividend payouts. While return expectations should be moderated, we believe the current negative sentiment potentially creates more attractive entry points.
India: Focus on consumption recovery, domestic cyclicals, and financials
In India, the consumption landscape presents a mixed picture, though we’re seeing encouraging signs of consumption revival in rural areas. We’re also optimistic about the export potential of companies that have established international footholds in recent years. Our long positions in India are primarily focused on consumption recovery (capitalizing on sectors poised to benefit from India’s internal economic dynamics and development of new consumption cohorts), industrials (historically underinvested sector that presents growth potential as India continues its infrastructure and manufacturing push), and financials (continue to see leading banks as steady compounders), as well as selective mid-cap companies that offer export optionality.
On the short side, we’ve identified opportunities in India in sectors facing new competitive pressures from well-funded entrants. A prime example is unsecured retail finance, where regulatory concerns about growth rates and deposit access are creating potential headwinds. The relatively high valuations in this space further support our cautious stance. We’re also exploring short positions in certain global cyclical names within India, which may face challenges from international economic fluctuations.
Korea: Governance improvements and tech cycle drives resilience
We maintain a positive stance on the Korean market, premised on our view of a soft landing. Recent improvements in corporate governance are expected to drive meaningful re-ratings as companies increasingly recognize the value of enhancing shareholder returns. In the tech sector, Korean semiconductor names have performed well. While the sector may be vulnerable to near-term pullbacks, we expect sustained demand driven by the PC and smartphone upgrade cycle as new AI features are embedded.
ASEAN: Attractive valuations and emerging market potential for Vietnam
Finally, in ASEAN, we maintain a largely constructive view of the region, which has demonstrated resilient performance in recent months. Interest rates play a significant role in ASEAN markets, and recent rate dynamics have contributed to the positive performance. The region’s appeal is bolstered by its relatively low valuations and low foreign ownership levels. However, while attractive valuations are a key draw, we remain mindful of the lower liquidity in these markets.
Vietnam is a key active weight among our ASEAN exposure. The country is making significant strides towards achieving emerging market status, with proposed amendments to its Securities Law addressing key issues such as transparency, fraud prevention, and market infrastructure, potentially paving the way for an upgrade from frontier market status as early as 2025. This potential upgrade would attract increased foreign investment and improve its market dynamics.
Overall, we expect markets to be choppy over the next 3 to 6 months, influenced by factors such as the upcoming US elections and broader structural economic issues. While challenging, these dynamics create opportunities for disciplined, fundamental investors. Our 3 to 5-year investment horizon allows us to look beyond short-term fluctuations and capitalize on attractive entry points as they arise. As monetary policy shifts towards easing, we are balancing defensive stability with the potential for reasonable earnings growth, aiming to navigate anticipated volatility while remaining poised to capture upside as economic conditions evolve.
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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.