While the US market, specifically the technology sector, continues to hold favour for investors, fund managers have outlined why a number of Asian economies could provide interesting opportunities in the year ahead.
The Japanese equity market has been experiencing a so-called “renaissance” in recent months, hitting new highs after decades of stagnation following the burst of the bubble economy during the late-1980s.
The benchmark Nikkei 225 Index posted a robust gain of approximately 28 per cent in 2023 and is up 16.26 per cent year-to-date as at 12 March 2024.
Last month, Talaria’s co-chief investment officer, Chad Padowitz, highlighted Japan as a “bright spot” for investors.
“It’s a large economy, maybe not as big as it was 20 years ago, but it’s a large economy, and home to some very well-run companies. It is a broadly stable economy that’s slightly getting some pricing power, which is new for it, and the corporate sector’s balance sheets are in very good shape, which is quite unique where in most cases in the world, it’s gone the other way around,” Padowitz told InvestorDaily.
He pointed to the notable improvement in corporate Japan, especially in terms of strong balance sheets and large cash reserves, which could prove advantageous for fund managers in the event of a yen strengthening amid a possible lift in rates this year.
According to Maple-Brown Abbott’s Will Main, head of Asia, and Howard Ho, portfolio manager Asian equity income, improving corporate governance lies “at the heart of the move”, with similarly encouraging moves observed in neighbouring countries.
“Building on the introduction of Japan’s Stewardship Code in 2014 and Corporate Governance Code in 2015, the Tokyo Stock Exchange took more direct initiatives from early 2023, resulting in a directive that listed companies are compelled to disclose plans to improve profitability and company valuations,” they explained.
“The intention is [to] improve capital allocation and overall valuations and we believe the results are clear: corporate Japan is responding, and share prices are rising.”
Turning to one of Japan’s neighbours, South Korea, Main and Ho noted an intertwined and complicated history, with a number of commonalities including export-oriented growth and strong government support.
Many of the economies’ industries, too, have seen long-held rivalries, including semiconductors and automobiles.
“With that background, it was perhaps less of a surprise to seasoned watchers of these markets to see South Korea’s Financial Services Commission announce details of a ‘Corporate Value-Up Program’, a plan similar to Japan’s aimed at addressing the discount that many Korean companies trade at relative to their international peers,” they observed.
This “value up” looked to span several avenues including the creation of a dedicated index and an exchange-traded fund (ETF) for companies actively participating in the program, offering investors a targeted investment vehicle, and tax benefits to incentivise participation.
The executives opined the potential value-add here could be even larger than in Japan, pointing out that the entire Korean market valued at ~1.0 price-to-book and some ~69 per cent of all companies currently listed trading below book value, compared with ~47 per cent in Japan.
“It is early days in Korea’s path to closing the discount and important details around tax breaks and other incentives remain outstanding. Attracting participation from key companies … as well as developing a robust monitoring framework to ensure genuine improvement will be central to the success of the program. Yet with Japan’s precedent, it will be increasingly difficult for management teams across corporate Korea to resist the growing shareholder pressure,” they affirmed.
Irene Goh, abrdn’s deputy global head of multi-asset and investment solutions, also elaborated that the fund manager had identified opportunities in these Asian economies.
“On equity regions, we continue to favour the US and the tech sector but given the strong rally we witnessed last year and the resulting impact on valuations, we prefer to add to technology exposure through more diversified plays, such as via Korean and Taiwan equities,” Goh stated.
“We expect Japan to do well benefiting from a shift in corporate behaviour that places strong emphasis on profitability and returns excess capital to shareholders.”
