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2024 Q3 Asia Investment Outlook: Policy shifts give investors reasons for optimism
09 Jul 2024
Stimulus and reforms that are addressing cyclical and structural issues should invigorate Asia’s markets.
By Martin Dropkin, Head of Equities, Asia Pacific
In dragon boat racing, a boat’s speed depends not only on how hard the rowers paddle but also on how the helmsman steers the team forward. It’s a marriage of brawn and brains that powers the team towards the finish line.
There’s an analogy here for Asia’s markets, many of which find themselves supported not only by policy measures to stimulate local economies (the ‘brawn’), but also by capital market reforms and economic transitions aimed at longer-term growth (the ‘brains’). When both work in tandem, the region draws investors in.
Reforms rewarding shareholders
Corporate governance reform has been a common theme across Asia in recent months. China, Japan, and South Korea have all stepped up efforts to push companies for higher dividends and share buybacks.
China's Nine-Point Guideline, which was unveiled in April, includes measures to encourage dividend payments and close corporate governance loopholes. Earlier this year, South Korea introduced its Corporate Value-Up Programme to reduce the so-called ‘Korea discount.’ In Japan, plans for corporate-governance reform received a boost more than a year ago when the Tokyo Stock Exchange started pressuring companies to increase returns for shareholders.
The ongoing changes should raise dividend payout ratios across the region. The average payout ratios for Chinese, South Korean, and Japanese companies in the past five years (see Chart 1) have been 31 per cent, 33 per cent, and 40 per cent, respectively. The global average is 48 per cent; in Europe it is 65 per cent - so there is some way to go. It may take time for Asia’s ‘iron roosters’ - a term the Chinese use for companies that do not pay stock dividends - to change their ways, but we have seen clear improvements this year already. Reforms like these will help burnish the appeal of companies with consistent dividend growth and bring about welcome progress to local capital markets.
China: green shoots and property
Our outlook for China’s ‘controlled stabilisation’ this year remains intact, as green shoots continue to emerge in corners of the country’s economy.
The most obvious is in manufacturing, supported by a resurgence in overseas demand and Beijing’s focus on high-tech production. Manufacturers of electric vehicles, medical imaging equipment, and heavy machinery are eyeing foreign markets as domestic demand stays subdued.
There are some upbeat signals from consumption too, such as the rebound in holiday travel.
But the sluggish property sector, which accounts for a big portion of Chinese household wealth, continues to weigh on consumer sentiment.
Policymakers ramped up support for this struggling market in May, trying to absorb unsold apartments while avoiding any new asset bubbles. But these policies are not intended to kickstart a renewed acceleration of economic growth. Instead, the aim is to engineer a stabilisation in property to facilitate an ongoing, multi-year transition into a new growth model driven by consumption and high-end manufacturing.
We expect policymakers will remain focused on the economic transition goals but will also use targeted and countercyclical policy easing to stimulate the economy and restore business and consumer confidence.
Elsewhere: the other pockets of brightness
While China reaches for recovery, its Asian peers are also forging ahead.
India is benefiting from robust growth momentum, a sizeable working-age population, and strong consumer spending.
At the same time, the surprise election outcome that saw Prime Minister Narendra Modi fall short of his expected majority has introduced some volatility into Indian markets. We expect to see a constrained National Democratic Alliance (NDA) government, but this won’t disrupt the country’s long-term growth story. A coalition government with more checks and balances should contribute to investor confidence. In the near term, we expect some consolidation in small and mid-cap sectors where valuations are at frothy levels, while financials and consumer businesses should see positive moves.
Last but not least, Taiwan - home to the world’s leading semiconductor and high-technology companies, which now form a significant part of global supply chains. We are still in the early stages of the AI technology cycle, and the evolving AI story will continue to fuel demand for advanced chips, supporting optimism around Taiwan’s leading firms.
While bright spots are multiplying, we’re mindful of the risks of the coming months, ranging from geopolitics to the impact of higher-for-longer US interest rates on Asia’s currencies. However, supportive policies and long-term reforms should give investors much to cheer about in the third quarter.
