CIO remains most preferred on Chinese equities, but believes there is more to investing in Asia than just China. (UBS)

Although data also pointed to continuing headwinds for the housing market, with new home prices falling at the fastest pace in 10 months, the releases reinforce our view that stimulus measures are supporting activity.

But while we remain most preferred on Chinese equities, there is more to investing in Asia than just China.

India’s market is an effective complement to Chinese stock exposure given different drivers for potential gains in the two markets. India is already the world’s most populous country. We expect it to account for a fifth of global economic growth over the next three years (2022 to 2024), and it's set to overtake Japan to become the world’s third-largest economy by the end of the decade. Investor interest is rising—foreign institutional investor inflows of more than INR 1tr (around USD 12bn) in the second quarter of 2023 were the biggest since the fourth quarter of 2020, according to Bloomberg.

In addition, the country’s external vulnerabilities have eased, with inflation and the external deficit falling. Equity market valuations are not optically cheap but look fair, in our view. The Nifty 50 Index’s current price-to-earnings ratio of around 20 times is around 10% below the Modi-era average, with expected earnings growth of 12–13% next year, according to our estimates.

Indonesian equities look set to outperform, in our view. Investors have warmed to Indonesian assets in recent months. Headline inflation has halved to 3%, boosting consumption potential; foreign direct investment stands at the highest levels in at least six years; and a move to a current account surplus has lowered risks. Indonesia’s increased positioning as an electric-vehicle hub also presents long-term opportunities. Added to this, current valuations don’t reflect this brightening outlook. MSCI Indonesia’s forward price-to-earnings ratio of 13 times is one standard deviation below its 10-year average. We expect low-teens total returns over the coming 12 months.

Japanese value stocks should benefit from both rising earnings and improving governance. While value stocks have underperformed year-to-date in much of the world, Japan is an exception, with the MSCI Japan Value Index rising 31% year-to-date. We expect that outperformance to continue. In particular, profitability is improving for banks, where a high dividend yield of 3.5–4% provides a degree of defensiveness. Governance reforms should also support stocks with a low price-to-book value.

So, in our view, Asia offers a range of opportunities at present—including but not confined to the region’s largest economy.

Main contributors - Solita Marcelli, Mark Haefele, Yifan Hu, Christopher Swann, Vincent Heaney, Jon Gordon

Original report - There's more to investing in Asia than China, 18 September 2023.