Amid China’s market rout, ride rise of New Asian Tigers

There is lack of positive catalysts that can drive any meaningful turnaround in Chinese equities 

by IFAST RESEARCH TEAM 

CHINA’S stock market rout is seeing no end to the day against the worsening property downturn and waning consumer confidence. Although authorities are mulling plans to ramp up their support, optimism has quickly faded as attention shifts towards the effectiveness and sustainability of rescue measures. 

It’s evident that band-aids don’t fix the substantial challenges at hand. 

Despite historically low valuations, we see a lack of positive catalysts that can drive any meaningful turnaround in Chinese equities. At the same time, as the dominance of this Asian powerhouse wanes, we believe the stage is set for the New Asian Tigers — South Korea, Singapore and Japan — to showcase their potential to become the new driving forces behind growth in the region. 

S.Korea’s Chip Sales Will Top 40% YoY By 2Q25 

Firstly, the ongoing recovery of global trade conditions would be beneficial for South Korea’s economy, which relies heavily on exports, particularly semiconductors. 

In January, the country’s headline export growth rose 5.1% year-on-year (YoY), marking the third consecutive month of increase, largely driven by the improvement of semiconductor exports. In addition, the economy grew faster than expected recently, with the fourth quarter of 2023 (4Q23) GDP growth coming in at 0.6%, thanks to an export recovery that more than offset drags in domestic demand. 

Although the global semiconductor industry is still overcoming a downturn, we are confident that chip sales will top 40% YoY by 2Q25, powered by a new digital revolution where adoption rates of artificial intelligence (AI) are rising rapidly. 

This will have a significant positive impact on the South Korean economy and stock market. 

Furthermore, we note that while the Korea Composite Stock Price Index (KOSPI) has evolved over the decades, Samsung Electronics Co Ltd and SK hynix Inc continue to be the cornerstones of the index. This reflects the unwavering importance and dominance of these semi-conductor companies in the stock market and economy, which is not surprising as the duo collectively commands a market share of over 70% and 50% of global dynamic random-access memory (DRAM) and NAND chip production respectively. 

When it comes to investing in developing Asian markets like South Korea, we believe that an active approach makes sense. The region tends to exhibit inefficiencies and greater disparity in the levels of corporate disclosure and transparency, providing active managers with the opportunity to generate “alpha” over the long term. 

Driven by the improvement of semiconductor exports, South Korea’s export growth rises 5.1% YoY

Singapore’s GDP Will Soar By 4% In 2024

The prospect of an improving outlook for semiconductors will also bring positive implications for Singapore, an exports-driven economy. The nation boasts a highly skilled and productive workforce, positioning it favourably as a hub for advanced manufacturing. 

Notably, it plays a pivotal role in the global semiconductor industry, especially in the downstream supply chain, which involves the application testing and packaging of semiconductor products. Singapore commands a notable 20% of the global semiconductor equipment market. 

With the recovery in global semiconductor sales, the country’s exports of electronics fell by 11.7% in December 2023 from a year ago, improving slightly from a 12.8% contraction in the previous month. Anticipating a major upswing in electronics demand moving forward, we expect it to be a major driving force behind Singapore’s export growth. 

Consequently, we project that Singapore’s GDP will soar by 4% in 2024, surpassing the Trade and Industry Ministry’s forecast for growth between 1% and 3%. 

Additionally, amid ongoing geopolitical tensions between the US and China, Singapore has reaped the rewards of heightened capital inflows and reallocation to the region, driven by its geographic advantage, transparent legal regimes and tax incentives. 

Japan’s Index to Surpass 40,000 By 2025

The Japanese equity market, gauged by the Nikkei 225 Index, experienced a grand start to the year, surging to fresh 34-year highs. Following this impressive rally, we maintain our optimism for Japanese equities as long-term structural drivers remain in place. Based on our estimates, we project that the index would surpass 40,000 by 2025. 

Japan’s unemployment rate stood at 2.4% in December, down slightly from the 2.5% in the previous month. The labour market remains tighter compared to historical standards, placing upward pressure on wages. Meanwhile, annual wage negotiations have started, with companies aiming for wage hikes exceeding last year’s historic gains. 

Inflation is looking to become more entrenched, which should have positive implications on growth as the country steers away from a deflationary regime that lasted for the better part of the past three decades. Bank of Japan (BoJ) Governor Kazuo Ueda has also acknowledged that the probability of achieving the long-term inflation target of 2% is rising gradually. 

Corporate reforms are making progress as well. As of the end of December 2023, the Tokyo Stock Exchange (TSE) noted that 49% of companies listed on the Prime section of the exchange (such as the market division with the highest listing standards) have responded to requests to improve their capital efficiency. 

This was considerably higher than the 31% recorded in mid-July last year. We expect the trend of share buybacks and dividend hikes to continue in 2024. Consequently, there is potential to improve return on equity (ROE) and drive a re-rating in equity valuations. 

Final thoughts 

All in all, the uncertainty in Asia — largely attributed to the structural weakness in China — suggests that the New Asian Tigers would play an increasingly vital role as growth drivers in the region. The same can also be said for their role in investors’ portfolios. 

In our view, there are compelling investment opportunities in this group of rising Asian economies, underpinned by an impending surge in global semiconductor sales and long-term structural drivers such as corporate reforms. 

  • The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s editorial board. 

  • This article first appeared in The Malaysian Reserve weekly print edition