Chinese and Indian stocks have been favored over Japan in the second half of Asia

Shares in China and India are being touted as potential performers in Asia in the second half of the year as investors flock to emerging market themes.

About a third of 19 Asia-based strategists and fund managers informally surveyed by Bloomberg News said they see Chinese stocks outperforming more over the next six months. A similar number chose India as their top bet, with Japan a distant third.

Anticipated Federal Reserve interest rate cuts are seen acting as tailwinds for the two emerging markets, each of which also offers its own unique narratives. Survey respondents preferred Chinese stocks for their low valuations and expected policy changes, while favoring Indian stocks for their post-election optimism and relative immunity to geopolitical tensions.

“We believe that rating downgrades and expanding global growth present an opportunity for EMs, particularly in Asia, to lead in the second half of the year,” wrote Joseph Little, global chief strategist at HSBC Asset Management, in his opinion of the middle of the year.

EM shares in the region are already floating. The MSCI EM Asia Index outperformed the broader MSCI Asia gauge by the most since 2009 in the latest quarter. EM Asia was also the most net bought region in June, according to prime brokerage Goldman Sachs Inc. – as global stocks sold off at the fastest pace in two years.

Indian stocks have extended their rally since Prime Minister Narendra Modi’s ruling party secured enough support from key allies to form a coalition government, giving the leader a third consecutive term in power. The value of the country’s stock market surpassed $5 trillion for the first time in June as Modi pledged policy continuity and foreign investors returned to the market after two months.

A separate Bloomberg study of India showed that growth in the country’s stocks has the potential to accelerate later in the year as investors remain confident of corporate profit growth and the upcoming federal budget could provide a further boost to such areas. such as consumer spending and infrastructure.

Ray Sharma-Ong, head of multi-asset investment solutions for Southeast Asia at abrdn, favors Indian stocks as “multiple catalysts yet to be assessed”, including the government’s budget. He also sees Indian stocks as “more sheltered from US-China tensions and spillover effects from the US presidential election.”

Chinese shares, on the other hand, have struggled after a strong rally earlier in the year, with several major gauges entering a technical correction in recent weeks. However, both the broad survey and a separate one focused on China by Bloomberg found that analysts and money managers will be bullish on the world’s second-largest stock market for the next six months as global funds return and corporate profits improve.

HSBC Holdings is bullish on China, expecting “the very negative sentiment in Chinese equities to slowly turn,” according to Asia equity strategist Herald van der Linde. It is adding positions for the second half given “slow improvements in Chinese activity.”

The broad survey also indicated that geopolitical tensions stemming from the upcoming US election are a key risk for the Asian market. More restrictive policies could come as US President Joe Biden and former President Donald Trump battle to show their stance on China.

“The impact of escalating tension between China-US or China-Taiwan will be across the region,” said Hebe Chen, an analyst at IG Markets. “No Asian market is immune, especially the best performing markets today.”

More than half of respondents said Asian stocks are likely to outperform their US counterparts by the end of 2024, citing the Fed’s rate cut and cheap valuations. However, most of them see profits limited to 10 percent or less.

“Asia has the potential to outperform in a Fed tapering cycle,” Sharma-Ong said. “In addition to the policy rate cut, we have higher economic growth and earnings potential in Asia, cheaper equity valuations and higher carry currencies against the dollar.”