What is your outlook for the rest of the year for Asia ex-Japan equity?
Our outlook for China for the rest of the year has been slightly complicated by what has happened year to date. At the beginning of the year, we were very bullish on China and Korea, and less so on India and Taiwan. The bullish view on these two regions was valuation-driven. Now, year to date, the markets we were most bullish about have done well—Korea is up about 40% in dollars, and China is up around 25%, with Taiwan and India lagging somewhat.
We are still bullish on Korea and China despite their relative outperformance.
First of all, Korea. Something we’ve been waiting to see for over a decade has come to fruition—the fiduciary duty law. We believe this is the first of many laws that will be introduced in the Korean market. We expect that market to continue to do well on the back of positive news flow. Secondly, China. Although it’s up year to date, it remains—along with Korea—the cheapest market in our region. We expect news flow to be positive, and we believe we’re close to the point where consumer sentiment turns around.
What’s driving the divergence between China’s H-share and A-share markets?
One of the interesting dynamics this year in China is that the H-share market, which is normally accessed by international investors, has significantly outperformed the A-share market, which is mainly invested in by mainland Chinese investors.
There are several reasons for this:
- The A-share market has consistently been more expensive than the H-share market, and investors are recognising that valuation differential.
- There’s been easier connectivity between the two markets, allowing mainland investors to invest not only via the A-share market but also via the H-share market.
Some stocks are listed in both markets and have traded at premiums in the A-share market as high as 50% or more. One consequence of this greater connectivity is that the premiums at which A-shares trade versus H-shares for dual-listed stocks have come in.
From our point of view, the underperformance of the A-share market has created more opportunities than we’ve seen in years. As a result, we’ve been adding to our A-share positions in China.
Do you think the recent developments in South Korea are enough to address the so-called “Korea discount”?
This has been a personal passion of mine. We’ve been victims of poor corporate governance in Korea for over a decade. In Q1 last year, we published a report titled South Korea: Enough Is Enough, where we identified the problems with South Korean governance and what regulators need to do to address them.
We never imagined what would happen subsequently. The biggest reform we pushed for was the introduction of a fiduciary duty law of directors. We thought there was very little chance it would happen, but the letter we sent received a lot of support among local Koreans. The number of Korean investors has recently swelled to 15 million – a high proportion of the population – creating a groundswell of support for improved governance.
With the change in political leadership in June this year, the fiduciary duty law was adopted. Although the Korean market is up 40% year to date, we believe this development justifies that increase in movement.
Not only that, but we also see further progress on the horizon:
- The Korean government is discussing the cancellation of treasury shares, which are often used by controlling shareholders to unfairly exercise control.
- There’s potential for differential taxation to encourage higher dividend payouts.
- A mandatory offer law could be introduced, ensuring minority shareholders receive the same price as controlling shareholders in the event of a takeover.
So, even though the market is up significantly, we believe it has further to go. The news flow is likely to remain positive, and Korean market valuations are still among the cheapest in the world.
Why are you underweight Taiwan despite its strong tech sector?
Taiwan is an interesting case. If you look at the performance of the Taiwan Stock Exchange benchmark (TAIEX) over the last decade and compare it to the S&P, for example, the TAIEX looks like a US index – it moves almost in lockstep with the US market.
Why? Because TSMC makes up 40% of the Taiwanese stock market, and its performance closely mirrors the movement in the US which has been driven by the tech stocks.
We are currently underweight Taiwan. This is because we believe parts of the tech market – especially in Taiwan – are clearly overvalued. We also think the US market is probably overvalued. Given the tight correlation between the two, it’s hard to imagine a scenario where the US falls and Taiwan doesn’t, given that they have moved in lockstep for the past decade.
Our holdings in Taiwan are limited to TSMC and one small company. TSMC is an immediate beneficiary of AI and is delivering strong results, reporting mid-double-digit growth in revenue and earnings each month.
We’re concerned that many other Taiwanese companies are rising too on the same AI theme but lack the same fundamentals. They might be differential beneficiaries somewhere down the line of the AI boom, but the reason we like TSMC is because it is an immediate beneficiary of AI – as chip demand goes up, TSMC benefits. It doesn’t need to rely on other good things happening in the future which might result in a future benefit. We’re seeing the benefit immediately.
That’s why we’re underweight Taiwan overall but approximately equal weight in TSMC – we believe it will continue to benefit as the AI growth story unfolds.
