Equity investors look to China’s neighbors: South Korea, Japan

Norman Ray

Global Courant

Pedestrians in front of a pawnshop during Golden Week at night in Macau, China, on Sunday, April 30, 2023.

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China’s meager economic recovery since emerging from strict “zero-Covid” lockdowns has resulted in weaker sentiment towards the country, leading investors to look for alternative options – such as its closest neighbours.

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In particular, equity markets in Japan, South Korea and India have all benefited greatly from disappointment over China’s reopening, highlighted by disappointing data from the world’s second-largest economy.

“While China is weak, investors elsewhere in the region have been looking for opportunities,” Goldman Sachs Chief Asia-Pacific Economist Andrew Tilton said in a Friday research note, adding that Japan is “in the spotlight” while India is “again. returned to focus in recent months.”

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The Nikkei225 is in bull market territory, up more than 23% year-to-date thanks to strong interest from foreign investors, including Berkshire Hathaway’s Warren Buffett.

from India Handy 50 index is up nearly 7% so far this quarter, recouping all losses from its March low, while the South Korean Kospi index is up 18% since the start of the year.

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This is in stark contrast to the sell-off in the Chinese stock market. The CSI 300 index, which measures the largest publicly traded companies Shanghai And Shenzhenis down 5.29% quarter-to-date, erasing any gains from earlier this year when stocks rebounded from reopening momentum.

The Hang Seng index also hit bear market territory last month and is down nearly 2% since the start of the year, data from Refinitiv shows.

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“Investor sentiment about China has continued to weaken and, in our view, is near the lows we’ve seen only a handful of times in the last decade,” Goldman Sachs’ Tilton said in the note.

Higher goals for Japan

Foreign investors have undoubtedly played a key role in driving the Japanese market and preserving it highest levels the Nikkei has seen since 1990.

The latest data from Japan Ministry of Finance shows that foreign investors continue to build on their Japanese equity holdings as domestic investors remain the net buyers of foreign bonds.

Foreign investors netted JPY 342.18 billion ($2.45 billion) worth of stocks in the week ending June 2. according to a Reuters calculation, totaling about 6.65 trillion yen in net purchases of Japanese stocks this year. During the same period last year, foreign investors had sold about 1.73 trillion yen net.

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

In its mid-year global outlook, Morgan Stanley predicted that Japanese equities will outperform their global counterparts: “Japan is our most preferred region, with improving ROE (Return-on-Equity) and superior EPS (Earnings). per share) outlook,” Chief Investment Officer Mike Wilson said.

The company raised its estimates that the Topix index would rise 18% by June 2024 from its previous target of a 13% gain.

“Japan looks (even) more attractive, while we prefer EM (emerging markets) over the US and the EU,” Morgan Stanley strategists said in a note. for Japanese companies.

Positive for Korean technology stocks

South Korea is another market under close scrutiny due to ongoing concerns about China’s recovery.

Korean technology stocks, which make up about half of the Kospi 200 index, have been the main driver behind UBS Global Wealth Management’s “most preferred” status in the industry and its market.

Note that the bank expects Interest rates in the US will soon peak, followed by a fall in interest rates U.S. dollarUBS wrote in its monthly outlook: “We continue to favor semiconductors in Asia and Korea over the next 3-6 months, which we have previously identified as the winner in such an environment.”

The low price-to-book ratio of South Korean tech stocks makes it “an attractive alternative to more expensive tech segments,” UBS said, noting that there is still “significant value” to be seen in China’s e-commerce stocks, which are up 20% decreased. year to date. Price-to-book ratio is an important metric used by traders to measure the value of a stock.

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

Goldman Sachs is also confident in the South Korean market and expects more foreign investment ahead.

“We are relatively bullish on Korea, as we are less concerned about broader domestic spillovers from housing sector weakness, and more optimistic about foreign portfolio inflows,” said Goldman’s Tilton.

Meanwhile, the Bank of Korea is expected to be one of the first central banks to implement a monetary policy pivot, despite Governor Rhee Chang-yong telling CNBC it is still “premature” to discuss a rate cut.

Banks such as Citi and Nomura expect an interest rate cut of 25 basis points as early as the third quarter of this year.

An investor looks at screens showing stock market movements at a securities firm in Fuyang in China’s eastern Anhui province on May 29, 2023. (Photo by AFP) / China OUT (Photo by STR/AFP via Getty Images)

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South Korea’s money market fund (MMF) hit an all-time high at the end of May. facts of Korea Financial Investment Association showed. Total money market fund assets under management stood at 172.7 trillion South Korean won ($134 billion), an increase of 22% since the end of September last year.

a money market fund is a type of fund that invests in highly liquid short-term instruments, including cash, and is seen as a place of safety in the midst of a volatile market.

Fitch Ratings Senior Analyst Chloe Andrieu said in a Comment dated June 8“The rise was driven by institutional investors turning their assets into high-quality investments, such as money market funds,” adding that rising interest rates around the world have also contributed to the shift.

Newly launched funds in China, on the other hand, marked the smallest holdings since 2019 for the first five months of this year, totaling 432.1 billion Chinese yuan ($61 billion), according to data from local advisory firm Z-Ben Advisors.

India’s ‘perfect macro mix’

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

“Customers are increasingly asking about India’s potential to benefit from greater investment amid supply chain reconfiguration,” said Tilton. The company said it is “generally positive on the medium term,” citing India’s continued monetary policy, credit conditions and prospects for attracting foreign direct investment.

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HSBC’s chief economist for India and Indonesia, Pranjul Bhandari, said ahead of the Indian central bank meeting in June that leaving interest rates unchanged “would allow the continuation of the perfect macro mix”, pointing to higher growth and lower inflation forecasts.

The company also raised India’s gross domestic forecast for 2024 from 5.5% to 5.8% and expects the RBI to make two rate cuts in the first quarters of 2024, pushing the repo rate to 6% by mid-2024.

“India’s economy has improved a lot from a year ago,” said Bhandari. “According to the latest high-frequency data, GDP growth momentum has remained stable, with the informal sector catching up as formal sector growth slowed,” she said.

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

The Organization for Economic Co-operation and Development also expects India’s economic growth to outpace China’s this year and next, according to its latest global outlook report.

“Growth has surprised positively recently and we believe an improving informal sector is at the core,” said Bhandari. “Rising government spending, and part of the central government’s budget supporting social security schemes, is likely to continue to support demand from the informal sector.”

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