As Investors Move to Northern Asia, A Significant Turn Of Events Is Developing

The early resurgence in North Asian equities is being heralded as the start of a potential bull run as expectations for China’s progressive openness as well as the bottoming out of the chip industry deepen. Goldman Sachs Group Inc. strategists predict Southeast Asia and India to lose equity leadership to China and Korea next year, while Societe Generale SA believes Taiwan’s tech-heavy market is at an inflection point. Jefferies Financial Group Inc. has expressed similar views.

Due to China’s economic slowdown, Hong Kong, Korea, and Taiwan stocks have languished for much of the year. Indonesia and India, propelled by domestic demand, were resilient. The tables have flipped this month after a flurry of good policy initiatives by Beijing.

“Of worry to us is that Southeast Asia is beginning to underperform in the last several weeks, as investors migrate back into North Asia,” said CLSA chief equities analyst Alexander Redman. “Indonesia, as a defensive, domestically-orientated commodity exporter, was a logical haven to ride out the stock storm,” he added, but the market will be “less favored as investors reengage some deep value cyclical exposure in North Asia.”

Hong Kong’s key equity indexes rose 20% in November, outperforming Asia and major global rivals, as China called for more targeted Covid curbs and real estate policy support.

This month, foreigners have invested $5.8 billion in Taiwan stocks, the first in six months and the largest in 15 years. Korean share buying will reach $2 billion for a second month.

Indonesia, formerly a popular inflation hedge, is flat in November and poised to see monthly flows turn negative for the first time since July. Investors are also more skeptical about valuations in India, where benchmarks just touched record highs, with Goldman Sachs forecasting the market to substantially underperform in 2023.

“Any positive catalysts such as a potential China re-opening and policy support, easing of geopolitical tensions or tech cycle bottoming is likely to fuel a significant rerating” of North Asian markets, Jefferies strategists lead by Desh Peramunetilleke wrote in a note. The brokerage is overweight Hong Kong, China, Korea, Taiwan, neutral on Indonesia, and underweight India. Since Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. dominate their chip markets, South Korea and Taiwan are positive. They trade mostly with China.

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Morgan Stanley, SocGen, and Lombard Odier Private Bank advised investors to cautiously return to Asian semiconductor companies this month.

Last week, SocGen strategists led by Alain Bokobza stated that share prices often bottom two-to-three quarters before the semiconductor cycle bottoms. “We may be here.”

M&G Investments, Eastspring Investments, and Franklin Templeton Investments are betting on Hong Kong Chinese shares to have their best month since 2006. That’s not to imply the way uphill for North Asia will be smooth.

With their strong export dependency, the markets are sensitive to the possibility of a global recession and are typically at the focus of geopolitical conflicts that include the US and China. Further, a surge in viral cases in China to a record is also tempering the good market trend.

“There are persistent concerns from the geopolitical side of the consideration,” said Vivian Lin Thurston, portfolio manager at William Blair Investment Management. And even if the industry cycle is changing, “if the global economy is getting into a slowdown, I think we have to review the cycle and the thesis,” she added.

However, with northern economies’ earnings estimates falling deeply, markets may have additional upward potential. Equity benchmarks in China, Korea and Taiwan are still down more than 15% year-to-date, while those in Indonesia and India are up roughly 7% each.

For China watchers, a Politburo meeting in early December, followed shortly after by the annual Central Economic Work Conference, may yield important signs.

In an interview earlier this month, Morgan Stanley head Asia and EM stock strategist Jonathan Garner stated, “If we take the metaphor of a train leaving the station, the leading locomotive is Korea and that’s already far out of the station.” “Taiwan engine is leaving too. China is in the middle of the train.”

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Foreign funds dealing with Hong Kong have bought 49 billion yuan ($6.8 billion) in mainland stocks.

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