If you’re a stringent saver in China or Japan, 2024 could be the year to finally put your money to work. The Japanese government is doubling the limit on NISA, the country’s tax-exempt investment scheme, potentially unlocking billions of dollars from untapped savings. In China, where saving rates (as a percentage of GDP) are much higher than the global average, authorities are increasing investment quotas for overseas stocks and bonds to meet feverish demand.[1] Such is the appetite for foreign markets that some traders are willing to pay a 40 per cent premium on the underlying assets for exchange traded funds (ETFs) that invest outside of China.[2]
As things stand, individual investors in these two leading Asian economies are the most cautious in the region. In a survey of over 6,500 retail investors by Fidelity International and YouGov,[3] between 70 and 78 per cent of Chinese and Japanese investors hold part of their portfolios in deposits (compared to 56 per cent in Singapore and 38 per cent in Australia, for example). However, as the US Federal Reserve prepares to cut interest rates, they and other investors in the region are getting bolder. 53 per cent of respondents said they plan to increase their equities holdings, while 42 per cent said they would decrease cash holdings.[4]
The paradox is that these same investors aren’t quite ready to give up the income they’ve been enjoying from high interest rates. About two thirds state that they are more likely to invest in income investments. Despite the overall risk-on sentiment, investors are split down the middle on whether to roll over existing deposits – with ‘for’ and ‘against’ both standing at about 30 per cent (the rest are unsure).
So, where is Asia’s new money headed? Over half of the respondents prefer markets outside of Asia, with the US and its AI-fuelled ‘magnificent seven’ tech stocks coming out on top (first choice for 34 per cent of respondents). Another 25 per cent chose global equities. In mainland China, 31 per cent of investors favour Asia ex-Japan and 24 per cent want emerging markets. Japan, where 58 per cent opt to invest domestically, is the only market with a clear home bias.
Asia’s bright spots
We often caution against home bias. If investors, for example, had remained overweight domestic equities when an increasing portion of global growth came from outside of their home market, they would have missed out. But for Asia’s investors who want to take risk whilst retaining income right now, a bit of regional home bias may be exactly what’s needed.
Across China, Japan, and Korea authorities are encouraging companies to reward investors. That was less of a worry when China was growing fast, or when Japan was busy dealing with its deflationary headache, but the situation in both countries has changed dramatically. Seoul is likewise looking to solve the long-standing ‘Korea discount’ conundrum with higher shareholder return. These are thought-through reforms that promise to deliver structural change and steady income in years to come. While dividend payout ratios in these countries (currently between 30 and 35 per cent) are behind the global average (45 per cent), we expect them to gradually catch up as reforms take hold.[5]
Asia is also where growth and income intersect. Just like the US, Asia is a beneficiary of the AI megatrend – albeit with a greater focus on hardware. Markets like Korea and Taiwan are home to some of the biggest manufacturers of semiconductors, the foundational material used to build the brains of artificial intelligence in electronic chips. About a third of Korea’s benchmark Kospi index is filled with stocks related to chips. Not only does this dominance in semi supply chains boost earnings growth in good times, but it also builds financial resilience for these companies to weather bad times, making them more likely to reward investors through cycles – and therefore decent income investments.
Value for money
Feverish valuations alone shouldn’t dissuade Asian investors from gaining US exposure (some companies deserve their costly price tags). But it should encourage them to look more broadly for cheaper alternatives: major markets where pessimism is perhaps overdone, and quality companies are trading at a discount.
The obvious candidate is China. Some investors have soured on stocks there because the economy doesn’t grow as fast as it used to. But that’s a natural consequence of China’s ongoing transition – from high growth to quality growth. Diversifying drivers of economic progress across several sectors, instead of pinning all hopes on real estate, should be celebrated by long-term investors. Near term, policymakers are stepping up support to stabilise the economy. The third plenum in July was followed swiftly by unexpected interest rate cuts.
In any case, economic growth isn’t everything for equities. Cheap valuations provide a margin of safety in China that’s enviable for investors in US, Europe, and Japan. We’ve come across 50-year-old companies trading at just four to five times price-to-earnings. Slower GDP growth means weaker companies should go out of business, for example in the crowded express delivery sector, which will make industry leaders more attractive. Tough times are teaching companies to become more resilient, too. Astute consumer brands have survived by adapting to changing habits, and China’s demographic deficit has spurred innovation in healthcare. Expect more winners to emerge in AI and the energy transition – and outpace the economy.
Nowhere like home
Having spent several years sitting on cash, it’s only natural that investors in Asia feel tempted to chase growth at all costs, even if that be in already-expensive stock markets. But they need not sacrifice income for capital appreciation. A more cool-headed strategy could balance global growth with income and value from Asian markets, whilst providing some stability – an increasingly important commodity in a volatile world. For Asia’s investors on the hunt for something new, there’s nowhere quite like home.
[1] Bloomberg: China Raises Limit on Overseas Investment After 10-Month Pause (3rd June 2024)
[2] Bloomberg: Chinese Fervor for Overseas Stocks Is Breaking ETF Trading (30th January 2024)
[3] The survey was conducted by YouGov in six markets between 15th May and 24th May, 2024 and published in July. Investors aged between 18 to 69 with 1,003 in Australia, 1,500 in mainland China, 1,002 in Hong Kong, 1,003 in Japan, 1,002 in Singapore and 1,005 in Taiwan, to a total of 6515. Respondents have a minimum personal income of AUD45,000 annually, RMB 5,000 monthly, HKD15,000 monthly, JPY3,000,000 annually, SGD 2,000 monthly and NTD30,000 monthly.
[4] Percentages in this section are ‘net’ percentages, which take into account those who answered ‘agree’ and ‘somewhat disagree’ to the relevant statement in the survey.
[5] Bloomberg data, based on MSCI indices as of 19th August, 2024.
