Fiona Yang and Ian Hargreaves, co-managers of the Invesco Asia Trust, share their insights into why they think valuations in India are hard to justify, and the green shoots and valuation opportunities they see in China that are being overlooked.

Despite concerns over China’s slowing economy and geopolitical tensions, Fiona Yang and Ian Hargreaves at Atlanta-headquartered investment manager Invesco are overweight in China and underweight in India in their asset allocation.

“Given our contrarian approach, the positioning in itself is unsurprising. What is extraordinary is the degree of divergence in performance we've seen between these two countries, with China down 12 per cent over the last year, and India up 35 per cent,” they said in a note.

India’s continued momentum relative to peers has seen it narrow the gap with China and Taiwan as the first- and second-largest emerging markets by market capitalisation. India is touted as one of the world's fastest-growing major economies, backed by a resilient macro backdrop which includes a real estate boom, strong consumer sentiment in urban areas and a robust infrastructure capex cycle.

On Friday, the MSCI also removed 60 stocks from its flagship MSCI China Index, bringing the number of Chinese stocks removed from the MSCI Global Standard indices to nearly 200 in 2024 alone.

Despite their contrasting recent fortunes, Yang and Hargreaves have maintained their underweight position in India and slightly overweight China allocation. As value-focused investors, this contrarian positioning is due to their conviction that China and other overlooked Asian markets present stronger valuation opportunities.

India – a macro sweet spot
Yang and Hargreaves highlighted how India appears to be in a macro sweet spot, with a bull market supported by a strong capital expenditure cycle and robust domestic demand. Their Indian holdings have generally performed very well, but they have now sold outperformers such as pharmaceutical firm Aurobindo Pharma, industrial multinationals Larsen & Toubro and Mahindra & Mahindra, with valuations appearing increasingly full and implying long-term growth rates which they struggle to justify.

“For valuation-focused investors, the challenge has been to find new ideas that appear undervalued,” they said. The Indian market is trading at 4.0x price-to-book ratio, a level last breached nearly two decades ago, at a time when other Asian markets attracted a similar premium. As their increased underweight position in India suggests, they have been finding more attractive opportunities elsewhere.

China – overlooked green shoots
Yang and Hargreaves emphasised how pessimism over China has appeared to become entrenched: “Faltering demand in the property market, weak consumer confidence, and a perception that the policy response to market weakness in late 2023 was underwhelming has left many investors factoring in little chance of a recovery.” 

Their view has not changed, and the portfolio continues to maintain a slight overweight position in China and Hong Kong. They believe that much of this negative investor sentiment stems from overlooking abundant household savings and solid balance sheets, with recent policy announcements also suggesting a greater urgency to boost confidence and support growth. “Should attitudes towards China start to see an improvement, they will be doing so from a low starting point, with deeply discounted equity valuations likely to be very sensitive to signs that corporate fundamentals are starting to improve,” they continued.

Geopolitical tensions linger, but they have seen signs of stabilisation in the economy and policy support measures that signal a more determined attempt to support the property market.

Maggie Sun, senior portfolio manager at Japan’s Sumitomo Mitsui DS Asset Management is also optimistic about the country's outlook. She believes that Chinese equities are attractively valued. “The worst is now behind China, even if the property market might take longer than expected to recover significantly,” Sun told this news service. See more commentary here.

Outlook for Asia
Overall, Asian equity index valuations are trading well below long-term historic averages, and at a significant discount to developed markets, particularly the US. Yang and Hargreaves believe that there is scope for this discount to narrow.

Asian economies enjoy relatively solid fundamentals, with room to ease policy as we approach the start of a monetary easing cycle, with US dollar strength likely to cease being a headwind. Although concerns over the risk of US recession have been climbing, Asia’s growth prospects continue to compare favourably with consensus earnings' growth expectations of around 25 per cent for 2024 and 15 per cent for 2025. They believe that companies operating in Asian economies may see less earnings' vulnerability from a global slowdown relative to what is being implied in valuations, although India appears to be an exception given already elevated expectations.

They said that investors need to consider many things when investing in Asia or emerging markets. While becoming hotbeds of consumption and innovation following decades of rapid industrialisation, investors must still be mindful of geopolitical risks and the global economic cycle. But with these economies enjoying stronger fundamentals, liquidity conditions set to improve, and governments across the wider region supporting industry with pro-growth reforms and supportive measures, Yang and Hargreaves believe that Asia and emerging markets have some of the most exciting investment opportunities in the world.