Equity investors look to China’s neighbors – South Korea, Japan and India

China’s lackluster economic recovery since emerging from strict “zero Covid” lockdowns has dampened sentiment towards the country, prompting investors to look for alternative options — like its close neighbors.

In particular, stock markets in Japan, South Korea and India have all been major beneficiaries of disappointment over China’s reopening, highlighted by lower-than-expected data from the world’s second-largest economy.

“Amid China’s weakness, investors have looked elsewhere in the region for opportunities,” Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs, said in a research note on Friday, adding that Japan was “in the spotlight” while India “is back.” also to focus in recent months.”

The Nikkei 225 is in bull market territory, up more than 23% year-to-date thanks to garnering interest from foreign investors, including Berkshire Hathaway’s Warren Buffett.

India’s Nifty 50 is up nearly 7% so far this quarter and has pared all its losses from its March low, while South Korea’s Kospi is up 18% year-to-date.

This stands in stark contrast to the sell-off in the Chinese stock market. The CSI 300, which tracks the largest listed companies in Shanghai and Shenzhen, fell 5.29% on a quarterly basis and erased all of the gains seen earlier in the year, when stocks rose as momentum reopened.

Refinitiv data showed that the Hang Seng Index also touched bear market territory last month and is down nearly 2% since the beginning of the year.

“Investor sentiment on China has weakened further, and our view of rock bottom levels has only been seen a handful of times over the past decade,” Tilton of Goldman Sachs said in the note.

Foreign investors have undoubtedly played a major role in driving the Japanese market, maintaining the highest levels the Nikkei has seen since 1990.

The latest data is from Japan Ministry of Finance It shows that foreign investors continue to build on their positions in Japanese stocks as domestic investors remain net buyers of foreign bonds.

Foreign investors bought a net 342.18 billion yen ($2.45 billion) of shares in the week ending June 2, According to a Reuters account, with a total of 6.65 trillion yen in net purchases of Japanese stocks this year. Over the same period last year, foreign investors sold a net worth of nearly 1.73 trillion yen.

Wall Street banks including Morgan Stanley and Societe Generale are among the bullish on Japanese stocks, holding “long” positions.

In its mid-year global outlook, Morgan Stanley forecasts Japanese equities to outperform global peers: “Japan is our favorite region, with an improving return on equity.” [Return-on-Equity] And EPS is superior [earnings per share] expectations,” said chief investment officer Mike Wilson.

The company raised its estimate for the Topix index to rise 18% by June 2024 from its previous target of 13% gain.

“Japan [is] It looks more attractive, while we prefer using EM [emerging markets] Against the United States and the European Union, strategists at Morgan Stanley said in a note, adding that “accelerated regional growth and strong domestic GDP should support earnings” for Japanese firms.

South Korea is another closely watched market as concerns about China’s recovery linger.

Korean technology stocks, which make up nearly half of the Kospi 200 index, were the main drivers behind UBS Global Wealth Management’s “most favored” status in the sector and its market.

Noting that the bank expects US interest rates to peak soon followed by a decline in the US dollar, UBS wrote in its monthly outlook: “We remain more favorable to semiconductors in Asia over the next three to six months, and Korea, which we have previously The winner is highlighted in such an environment.”

UBS said South Korea’s low price-to-book ratio makes it an “attractive alternative to more expensive technology sectors,” noting that there is still “significant value” seen in China’s e-commerce stocks, which are down 20% year-to-date. g until today. The price-to-book ratio is an important metric that traders use to gauge the value of a stock.

“For China, questions remain about the sustainability of its economic recovery. This, and ongoing geopolitical concerns, have weighed on the market,” UBS strategists said in the report.

Goldman Sachs is also confident in the South Korean market, and expects more overseas investment in the future.

“We are relatively bullish on Korea because we are less concerned about the broader domestic fallout from housing weakness and more optimistic about foreign portfolio inflows,” said Tilton of Goldman Sachs.

Meanwhile, the Bank of Korea is expected to be one of the first central banks to introduce a policy pivot to monetary policy, although Bank Governor Ri Chang-yong told CNBC that it is still “premature” to discuss a rate cut.

Banks including Citi and Nomura expect to see interest rates cut by 25 basis points as early as the third quarter of this year.

South Korea’s Money Market Fund (MMF) hit a record high at the end of May, data From the Korea Financial Investment Association show up. MMF’s total assets under management reached KRW 172.7 trillion ($134 billion), or a 22% increase since the end of September last year.

a Money market fund It is a type of fund that invests in highly liquid and short-term instruments, including cash, and is viewed as a safe place in the midst of a volatile market.

Chloe Andrew, senior analyst at Fitch Ratings, said in a report Note 8 June“The increase has been driven by institutional investors who are orienting assets towards high-quality investments, such as MMFs,” he said, adding that rising interest rates around the world have also contributed to the shift.

In contrast, newly launched funds in China recorded the smallest holdings since 2019 for the first five months of this year, raising a total of CNY432.1 billion ($61 billion), according to data from local advisory firm Z-Ben Advisors.

There is also growing interest in investing in India, according to Goldman Sachs.

“Customers are increasingly asking whether India can benefit from increased investment amid the reshaping of the supply chain,” said Tilton. It is “generally positive in the medium term,” the company said, citing India’s continued monetary policies, credit conditions and its prospects for attracting foreign direct investment.

HSBC’s chief economist for India and Indonesia, Prangul Bhandari, said ahead of India’s central bank meeting in June that keeping interest rates unchanged “will allow the perfect macro mix to continue,” citing higher growth and lower inflation expectations.

The company also raised India’s full-year GDP forecast for 2024 from 5.5% to 5.8% and expects the RBI to cut interest rates twice in the first quarters of 2024, bringing the repurchase rate to 6% by mid-2024.

“The Indian economy is much better than it was a year ago,” Bhandari said. “GDP growth momentum has been flat according to the latest high-frequency data, with the informal sector recovering from the slump and formal sector growth slowing,” she said.

The Reserve Bank of India held its benchmark repo rate steady at 6.50% last week for the second consecutive time – in line with market expectations.

The OECD also said in its latest Global Outlook report that the OECD also expects India’s economic growth to outpace that of China this year and next.

“Growth has been surprisingly on the upside lately, and we believe the improvement in the informal sector is at its core,” Bhandari said. “Increased government spending, and some relaxation in the central government budget to support social welfare programmes, is likely to remain supportive of informal sector demand.”