Global money is fast chasing alternatives in Asia stocks

SINGAPORE – As frustration over China's stock performance heightens, some of Asia's other major markets are powering ahead in their own right and emerging as more formidable alternatives for global investors.

The divergence has been on full display this week. A key Chinese stock gauge saw losses from its recent peak reach 20 per cent just as South Korea's Kospi flirted with a bull market and benchmarks in India approached all-time highs. Japanese stocks hit a three-decade high earlier in May while Taiwan continues to outperform most stock markets around the world.

Odds of a structural shift in Asia-focused portfolios are gaining traction as China decouples. The surge in these markets has come amid concern that China's economic slump will drag on equities across the region. Glowing prospects for world-leading chipmakers in South Korea and Taiwan, a revival of inflation in Japan and India's booming consumption are among the tailwinds boosting their stocks just as China indexes become global laggards.

“There are absolutely numerous opportunities within Asia outside of China,” said Christina Woon, investment director of Asian equities at abrdn. “Korea gives you exposure to a great number of companies within the battery and tech supply chain, Taiwan is home to more than just TSMC, and Japan gives you access to global leaders in their fields.”

Overseas inflows into Japan have continued for seven straight weeks through mid-May, while South Korea and Taiwan have netted at least US$9.1 billion (S$12.3 billion) each this year. By contrast, global fund allocations for China have dropped back to October levels, according to HSBC Holdings, and local fund sales in May slumped to their lowest since 2015.

Bullish Wall Street calls on China – dominant until a few months ago – are falling flat as a faltering economy and geopolitical tensions turn key gauges into global laggards. Manufacturing activity continued to slump in May, adding to the bleak outlook.

Fundamental shift

The outperformance of these other markets may be more structural as China's population shrinks and industries mature, with Beijing's regulatory uncertainties making any big bet a risky one. Stocks in Japan, India and Korea have beaten China peers more often than not since 2020.

“A re-allocation away from China may in fact have catalysed a wider rally across largely dispersed parts of Asia,” said Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management. The macro picture in emerging Asia is helping, with peaking interest rates, more pressure on the US dollar and resilient Western demand, he added.

Corporate reforms underway in Japan and an endorsement by Warren Buffett have stirred great excitement toward the nation's long-undervalued stocks. The Topix and Nikkei indexes boast double-digit gains this year, handsomely beating an Asia benchmark.

The tech-heavy markets of South Korea and Taiwan are rallying as global demand surges for all things AI and as the chip cycle is seen turning a corner. Benchmarks there too have gained at least 15 per cent each this year.

In India, a growing retail investor base and solid earnings are adding to the appeal of equities with foreign funds also piling in, helping drive the Nifty 50 Index to less than 2 per cent away from an all-time high.