- High PE Asian markets are few and far between, and they have underperformed this year.
- A couple of low PE markets remained mired in losses.
- But most low PE markets have shown strong returns this year.
- It’s not just about valuation; investor appetite has become more favourable toward Asia.
- Improved regulation and corporate governance are helping too.
Commentary: Value in Asian equities
With the S&P500 delivering over 490% since 2010, it has been hard going for Asia’s equity markets. The first decade of this century was characterised by bull runs in China, Hong Kong, and India, but the performance of China-adjacent stocks faded thereafter. This looked particularly striking compared to the stellar returns of US stocks. In the initial years after the pandemic, this trend persisted. Facing economic headwinds domestically and ever escalating trade wars externally, stock valuations remained largely depressed in the region, with a handful of exceptions.
At the end of 2023, the region could be divided into expensive and cheap cohorts. Going by end-23 PEs, India, Malaysia, and Thailand looked richly valued by regional comparison, while China, Hong Kong, Indonesia, the Philippines, and Singapore looked cheaper. At that moment, should a value-seeking investor have sold the expensive indices and bought the more reasonably priced ones?
The short answer is yes. Returns data from major Asian stock markets show that the three of the richest indices at the end of 2023 have all had negative returns so far this year. Some of the cheapest markets by that metric have had stellar returns, by contrast.
The story is not all black and white. Sometimes, there are good reasons for cheap markets to remain cheap. Markets with negative returns this year span the cheap and costly ends of the PE spectrum. Indonesia and the Philippines were attractively priced at the end of 2023, but have not managed to deliver positive returns, weighed down domestic and external sector uncertainties. However, the two cheapest markets then, Hong Kong and Singapore, have delivered strong returns so far this year.
A chart may reveal the wisdom of a tried and tested trading strategy, but several underlying drivers are at play. China adjacent stocks have turned around not just because they were cheap, but they have been buoyed by reduction in regulatory overhang, improved policy support, and investors’ desire to reduce their over-exposure to the US. A revival of the IPO pipeline, helmed by several exciting tech start-ups reaching scale, has also captured the imagination of investors. Japan, South Korea, and Taiwan, despite trade war related overhang, continue to generate substantial investor enthusiasm, fuelled, partially by a pick-up in home bias by their cash rich investors. Japan and South Korea have also reaped the benefits of structural reforms that have improved corporate governance. 
Most markets in Asia remain substantially cheaper than their counterparts in the West. That, plus evolving investor mindset about risk exposures, bodes well for most of the region’s stock markets, in our view.
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