Higher Interest Rates Boosting Cheap Chinese Stocks in Asia
As interest rates are expected to remain higher for longer, cheap Chinese stocks are gaining favor among investors in Asia. Corporate reforms in Japan and South Korea are also supporting a value investment thesis, while near-record-low valuations for Chinese stocks are attracting attention from M&G Investment Management.
Multi-asset managers in the region are becoming more selective in their investment strategies as central banks in Asia take a hawkish stance to protect their currencies. This shift has led to a decrease in the appeal of bonds, prompting investors to look towards stocks for returns.
Gary Tan, a portfolio manager at Allspring Global Investments, noted that in this environment, domestic-focused sectors such as Indian infrastructure stocks, Korean reform beneficiaries, and China’s domestic consumer and utilities plays could serve as safe havens.
The Federal Reserve’s expected easing in November, a departure from earlier predictions of multiple cuts in 2024, has led to foreign funds selling over $7 billion worth of equities in emerging Asia excluding China in April. This marks the first outflow in six months.
The outlook for currencies and bonds in the region is also bleak, with Treasuries remaining attractive over foreign counterparts and local currency government debt in emerging Asia losing value in dollar terms. In contrast, MSCI’s Asia Pacific equity benchmark has seen gains.
Some sectors in Asia that are garnering interest from managers include cheap Chinese equities and Japan’s financials. Chinese and Hong Kong stocks have seen a resurgence due to benign inflation and Beijing’s efforts to stimulate growth, with Hong Kong’s Hang Seng Index posting its best performance since 2011.
Japanese stocks, particularly in the financial sector, are also attracting investors due to the country’s growth revival and corporate reform efforts. The weaker yen, driven by high US rates, is expected to benefit exporters and tourism-related industries in Japan.
South Korea’s chip sector and India’s domestic consumer base are also areas of interest for investors. South Korea’s export-led recovery and rising semiconductor growth make it an attractive market, while India’s strong domestic consumption story and manufacturing prowess continue to appeal to long-term investors.
Overall, the higher-for-longer interest rate environment is reshaping investment strategies in Asia, with cheap Chinese stocks and other value plays gaining traction among investors looking for returns in a challenging market.
