The possibility of a soft landing in the US is increasing. We’ve witnessed clear signs of deceleration in mass consumption in the US for some time, while the Fed has been more concerned about inflation. However, now the Fed is increasingly addressing the other side of its dual mandate: rising unemployment. This shift in focus could signal a more balanced approach that supports economic recovery through interest rate cuts in the coming months.
Interestingly, despite the US economic slowdown, we haven’t seen a significant widening of credit spreads. This indicates healthy economic momentum, with nominal GDP remaining at reasonable levels, led by reshoring and investment-led demand.
In Asia, we are positioning our portfolio2 with the anticipation of upcoming interest rate cuts. We’re also closely monitoring currency movements in the region, particularly the Japanese Yen (JPY). While the JPY’s move above 160 against the US Dollar in recent weeks3 raised some eyebrows, we believe interest rate cuts should provide some respite to the JPY and other export-oriented currencies like the Korean Won and Chinese Yuan.
Interest rate cuts are also likely to boost demand, providing relief, particularly to the lower and middle-class consumers who were squeezed by the inflation shock over the last couple of years. As incomes grow and inflationary pressures recede, we anticipate an improvement in consumption in the coming quarters.
From a country perspective, we maintain a positive outlook on South Korea. Aside from the global economic recovery and anticipated interest rate cuts, we expect Korea to see longer-term benefits from its Value Up Program. With its focus on improving financial metrics, providing tax support, and enhancing corporate governance, the Value Up Program is poised to boost shareholder returns over time. By aligning corporate practices with global standards and encouraging better shareholder returns, we expect the program will create a more robust and attractive market for investors. Additionally, Korean companies are some of the biggest beneficiaries of the global uptick in investment spending, especially in the US and the Middle East. Given these favorable conditions, Korea remains one of our largest active weights in the portfolio, with diversified exposure across leading autos, IT, industrials, and materials companies.
Following the election, there was considerable skepticism regarding the Indian government’s commitment to fiscal prudence while navigating coalition politics. The 2024-25 Union Budget emphasized the balance of lowering the fiscal deficit to 4.9%, maintaining double-digit infrastructure spending, and earmarking funds for skill development and rural spending.4 This should instill confidence in local and foreign investors, encouraging them to increase their India allocations further. Meanwhile, a stable currency and improving growth prospects with monetary easing should provide a leg up for the nascent private sector investment cycle.
From a medium-term perspective, India continues to captivate us with its growth stories, particularly companies transitioning from small/mid to large cap status. We’re keenly focused on firms that have achieved critical mass domestically and are now setting their sights on expanding their export potential. This trend is evident across various sectors, including some of our holdings in auto ancillaries and the healthcare space. Our investment team’s recent visit to Mumbai and Bangalore corroborates the same (see trip notes attached). While current valuations may seem rich, we’re betting on the non-linear growth opportunity as these companies leverage their expertise to tap into new markets over the next 3-5 years.
Our Taiwan strategy is largely a play on the tech supply chain as Nvidia spends flow through to leading names like TSMC and Quanta Computer. While chip demand may soften as inventories build, we anticipate a new wave of demand as AI features are integrated into smartphones and PCs. Recent surveys indicate that user intention to purchase a new smartphone increased meaningfully after Apple announced it would release new AI features, supporting our stance on resilient AI-driven chip demand. In recent weeks, we’ve seen a correction in the tech sector, but we believe this is a healthy adjustment within a multi-year growth cycle. As new use cases for AI continue to emerge, the long-term outlook for the industry remains robust.
China’s nominal growth recovery will take time, with exports performing well but consumer spending remaining subdued. Lower-than-expected 618 shopping festival figures unsettled markets, but the two-month numbers are not as bleak since promotions began in May this year. Although consumers have money, they seek value maximization rather than upgrading. We expect the consumer behavior to improve in due course as the confidence builds up. Despite slower revenue momentum, the profitability of some listed companies (e.g. in sectors such as internet, gaming, and food delivery) has improved in recent quarters due to reduced competitive intensity. The initial recovery stage typically involves boosting profitability through reduced competition, followed by top-line growth. Additionally, these companies are looking to increase their dividend payouts through shareholder buybacks, which is positive from a shareholder return perspective.
Meanwhile, the Third Plenum reiterated support for high-quality development and innovation while managing risks from local government debt and the property sector. As a follow-up, nearly RMB 300 bn of a trade-in program financed by long-term treasury bonds was introduced to upgrade consumer durables and corporate equipment,5 a notable change from a few provinces’ past demand revival initiatives.
From a portfolio perspective, we are positive on leading players in specific sectors such as travel and tourism, mobile gaming, cosmetics, and export leaders like BYD, PDD, etc. Although there are concerns about potential higher duties if Trump comes to office, such tariffs may not be as straightforward to implement, given the US consumer would bear them. Moreover, unlike the US-China Trade War of 2018, Chinese companies are now more prepared, with many having established overseas manufacturing capabilities in the last 3 to 4 years. According to a recent UBS China CFO survey, exporters who intend to relocate plan to move 31-50% of their export production capacity abroad, with the majority planning to complete the move by 2026.6 This strategic shift mitigates potential trade risks and positions these companies for more resilient global growth.
In ASEAN, we continue to favor opportunities in Thailand, Indonesia, and Vietnam. Thailand’s tourism sector is poised for a rebound, with medical tourism particularly set to benefit, boosted by visa-free travel policies and resumption of flight capacity to near pre-Covid levels. In Indonesia, inflation impacted consumer spending. However, microfinance companies like Bank Rakyat Indonesia offer a strong growth runway as inflationary pressures ease and credit growth begins to pick up again. Finally, in Vietnam, the equity market outlook appears increasingly attractive, thanks to fiscal measures announced in June 2024. Public salary increases, VAT reductions, and tax relief are expected to boost economic growth and consumer spending in H2 2024, potentially lifting GDP and creating a more favorable environment for corporate earnings and investor sentiment. We expect this consumption revival to benefit companies like Techcombank and Phu Nhuan Jewelry, which are at the bottom of their earnings cycle.
Overall, we remain constructive on Asian equity markets due to the improving global economic outlook, anticipated rate cuts to boost economic growth, and country-specific growth catalysts such as Korea’s Value Up Program, India’s continued growth recovery, etc. The Asian region’s valuations vs developed markets are at a 20-year low, while the number of buyback announcements has gone significantly in the last 5 years. We seek to identify companies at the forefront of innovation and value creation across diverse sectors, such as technology, financials, autos, and healthcare. While challenges persist, we believe the current market environment offers compelling opportunities for long-term investors who maintain a disciplined and selective approach.
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 a Registered Investment Adviser with the U.S. Securities and Exchange Commission. 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 Investment Management’ 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 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 material. 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 material are prepared and maintained by Shikhara Investment Management and has not been reviewed by the Securities and Exchange Commission of the United States.
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.