Thoughts from the Road: Asia

Sometimes you just get lucky. My recent trip across Asia with my colleague Changchun Hua, who is based in Beijing, was one of those times. Singapore was hosting Formula 1 as I landed ahead of our annual investor conference, China rolled out some serious new policy measures the day before I got to Beijing, and I arrived in Tokyo the night before the election. Across these three destinations I spent a significant amount of time with corporate executives, government officials, deal makers, and investors. What did we learn on the ground?

1. China’s ‘Big Bang’ on policy changes has been well received. This moment is – to steal a line from Mario Draghi — a ‘whatever it takes’ moment for the country’s central bank. However, central bank liquidity alone will not heal what ails China; the demand side of the economic equation will need to increase to make the current rally sustainable into 2025, we believe. Key to our current conservatism is that there are still too many ‘excess’ homes (our estimates suggest upwards of 30 million), while, as we detail below, the propensity for consumers to spend will likely remain quite low. To this end, we highlight below three actions China can take to transform this market bounce into a sustained bull market, including additional fiscal stimulus, housing support, and market structure reform. Importantly, though, despite all the recently announced initiatives around interest rates, reserve ratio requirements, and refinancings, Changchun is not changing his 2025 GDP forecast of 4.6%, or his inflation forecast of 1.3%. Said differently, the recent stimulus will help lift the economy so it can achieve his base case. Indeed, in hindsight, after my fifth trip to China since the country re-opened, I believe that the risk of a deflationary growth undershoot was probably much more likely than we previously thought.
2. While the Shigeru Ishiba election victory in late September will be disappointing for some market watchers in Japan, the long-term corporate reform story remains intact, we believe. Just consider that the unwind of corporate strategic holdings in Japan grew to 3.7 trillion JPY in 2023, a 90% increase, and current trends for 2024 suggest similar strength. Meanwhile, Japan’s Private Equity industry is experiencing a major renaissance, and we believe that this activity will help boost corporate productivity and support the public markets. We think higher productivity will be critical to sustaining higher wages and higher inflation. This virtuous cycle will be key in the 2025-2027 period.
3. Southeast Asia is becoming an exciting destination for capital again. Return on equity is improving at the corporate level, and we heard lots of good things around consumption upgrades, data/digitalization, and intra-regional trade.
4. While we did not visit India on this trip, we spent a fair amount of time with executives doing business there. The Indian consumer remains confident, which is leading to lower loan losses. Productivity continues to be strong, reforms are working, and while this market is expensive, it may be justified as corporate earnings are poised to grow 15% per year for the next four years.
5. On the more cautious side, we spent time discussing the further splintering of supply chains amidst rising geopolitical tensions. Recent Israeli military operations in the Middle East targeting Hezbollah via exploding electronic devices such as pagers and walkie-talkies have only heightened the perception that our ‘Security of Everything’ message has legs.
6. Overall, though, we think that Asia is poised to enjoy significant capital markets gains in 2025. The Fed and China are easing at the same time, deficits are in check, and the region is generally under-owned (except for India). Our comparison about historical Fed easing cycles suggests that Asia ex-Japan would typically appreciate 24% if the U.S. economy does not enter a recession. One can see this in Exhibit 20. Moreover, with China’s recent stimulus news, we think that both cyclical and secular tailwinds are accelerating at a time when holdings of this region in global portfolios are well below average.