Asian equities represent much better value than US equities with attractive investment opportunities in several nations including in China, India, and Taiwan, with some Asian companies well positioned to benefit from the artificial intelligence (“AI”) boom, according to abrdn head of Asia Pacific equities, Flavia Cheong.
“Valuations for some very strong business franchises are trading at extremely deflated multiples despite resilient earnings and strong fundamentals, which make them compelling for active investors.
“Based on consensus estimates of price-earnings (PE) ratios for the current year1, the MXAPJ Index is trading at a PE of about 14.7, compared to 20.2 for the S&P 500 Index, 15.6 for the S&P/ASX 200 Index and 12.4 for the MSCI Europe Index,” said Ms Cheong.
Singapore-based Ms Cheong sees several companies in different sectors as having strong earnings prospects, including companies in infrastructure and technology. The huge demand for computer chips has, for example, benefitted Asian suppliers, including those to Nvidia, which has rallied in the US following the launch of ChatGPT last year.
“We regard generative AI as a game changer. When it comes to generative AI applications, ChatGPT is just the tip of the iceberg and demand for AI has accelerated much faster than expected, with the server and networking supply chain among the winners in this rapidly growing market. Some of the key beneficiaries would be core semiconductor and technology hardware companies such as Taiwan Semiconductor Manufacturing Company (TSMC) and ASML.
“Infrastructure needs to be built to support such AI applications, and Asia is home to some of the biggest stakeholders in this game. Asian technology supply chains are also well positioned for structural growth related to the rollout of 5G, big data and digital interconnectivity.
“TSMC, for example, as the world's largest pure-play semiconductor manufacturer, provides a full range of integrated services for its clients, including Nvidia. The key AI chips are all built on advanced semiconductor technology, and TSMC is the global leader in manufacturing computer chips, supported by companies such as ASML, which provides the equipment necessary to build advanced semiconductors,” she said.
The growing integration and adoption of technology also means a bright future for companies focused on gaming, internet, fintech and technology services like the cloud. Chinese company Tencent, for example, is strengthening its ecosystem, and abrdn sees huge potential in Tencent's advertising business as it starts monetising its social media and payment platforms.
Cheong also points to Samsung Electronics, which is a global leader in the memory chips segment, and a major player in smartphones and display panels. “It has a vertically integrated business model and robust balance sheet, alongside good free cash flow generation,” she said.
Elsewhere, the Indian share market offers plentiful opportunities for investors. Prime Minister Narendra Modi has effectively continued infrastructure projects which commenced under the previous administration, and this has attracted foreign investors. The economy too is growing strongly.
Where the Chinese economy is struggling to hit its five per cent economic growth target, the Indian economy is one of the fastest-growing major economies in the world today.
India’s growth is underpinned by a buoyant property sector that is in the early stages of a renewed upcycle, which is a stark contrast to China. India also boasts a robust banking sector with the strongest balance sheet in well over a decade, while increases in government spending on infrastructure are also supporting the economy.
“India’s relative political stability and bilateral and multilateral ties with other nations are also enabling India to counter China’s influence. India is positioning itself to benefit from the global supply chain diversification trend where multinational corporations are adopting a ‘China + 1’ strategy to reduce an overreliance on China,” said Ms Cheong.
Note: Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
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[1] Source: Bloomberg, 31 October 2023
