Asia’s Stock Markets, From The Ground Up
Herald van der Linde is the author of Asia’s Stock Market: From the Ground Up, an Adjunct Assistant Professor in finance at Hong Kong University of Science and Technology and HSBC’s Chief Asian Equity Strategist.
“Asia stock markets rallied as earnings rise” or “Asian stocks sink as COVID spreads” are commonly found headlines on newspaper’s front pages. The thing is, Asian stocks markets are all rather different and to blend them all into one is not only doing injustice to each of them, it also disguises the very thing that makes these markets attractive to investors – their unique diversity.
It is better to think of these markets as distinct groups -a central block (dominated by mainland China), the northern Asian markets (Korea, Japan and Taiwan), India and ASEAN. But even this ignores some of the smaller up and coming markets that deserve attention too, such as Vietnam and Bangladesh.
Given its size and the incredible amount of money that goes around in its markets, mainland China’s stock markets take centre stage. But there are quite a few mainland Chinese stock markets. The largest is Shanghai, also called the A-share market, followed by Hong Kong (also called the H-share market). Shenzhen has another stock market that focuses on tech start-ups. And recently a new market opened in Beijing.
Hong Kong is mostly populated by the large tech companies – think of firms such as Tencent and Ali Baba – while Shanghai lists more “traditional” firms such as banks, retailers and industrials. One of its largest listed firms is a domestic liquor brand “Kweichow Moutai”. This means that the “A” and “H” markets differ both in their make-up and the money that flows around in them. The result is that they easily move in the opposite direction at any given moment. So next time people talk about Chinese markets, ask them which one they are talking about.
These markets are dominated by domestic Chinese issues – think of rise of its middle class, the ups and downs in the local property market and China’s efforts to build wind, solar, electric vehicles and other new tech industries.
In recent years, the Chinese A and H markets have fallen significantly. China is adjusting its economy towards a new growth path, with more focus on renewables and high-end technology. That comes with significant risks to growth, which is one reason why investors stay away from the market. Big sectors that used to drive the economy – think of property and infrastructure – struggle with over supply and weak demand and share prices for property developers and construction firms slumped. In addition, new regulations for internet and education firms caused these sectors to fall. The smaller, new emerging industries in renewables and high-end tech grow much faster but are still too small to pull the overall market higher.
Korea, Taiwan and Japan are another block. The first two are dominated by hardware tech companies – makers of memory chips or components that end up in your laptop, iPhone, car or TV. The largest names are Samsung Electronics, memory chip maker Hynix in Korea and firms such as Taiwan Semiconductor (TSMC) in Taiwan which produces custom-made computer chips of the highest standard.
In both Korea and Taiwan, these tech stocks comprise over 60% of the whole market. In contrast with the mainland Chinese markets, what happens with their domestic economies is almost irrelevant to these stocks, as these firms sell their goods all over the globe. Demand for chips and tech products in the US, Europe and China is what matters most. It is therefore no surprise that these stock markets move more in tune with US stock markets.
It’s a bit different in Japan. Here too is a significant export sector (think of tech firms and Japanese auto brands) but this stock market also has a large domestic segment. Aging is a big theme for investors in those domestic markets (think healthcare and nursing homes). This market is a happy hunting ground for stock pickers that like small, focused and highly profitable firms that make all sorts of components – from robotic arms to bicycle gear.
But in 2023, a new topic dominated the Japanese stock market – improvements in corporate governance. Japanese firms, like Korean firms, are often part of large business groups (called keiretsu in Japan and chaebols in Korea) that have complex crossholdings between all sorts of different, often unaffiliated firms. A typical keiretsu or chaebol is made up of firms that focus on anything from tech products, insurance, foods, ships, banking, transport or retail. Busy investing in their own companies, these keiretsu or chaebols pay low dividends to their investors.
To change this, the Japanese government announced a new corporate governance code. In the past this was shrug off by these business groups, but this time the regulators publicly named those companies that did not meet specific standards. To the delight of shareholders, Japanese firms responded and raised dividend payments. Furthermore, Toyota said it would reduce some of the crossholdings and sold some subsidiaries. Other Japanese firms followed and stated that they, too, would put the knife into their complex crossholdings. In response, the Japanese stock index (the Topix) rallied in 2023.
Across the Tsushima Strait, Korea’s regulators noticed these efforts. They too announced that they might come up with a similar plan to improve governance to see Korean firms raise dividends and dismantle complex business structures. Were this to happen, like in Japan, expect investors to reward them for their efforts.
India is a whole different story. This is one of the most diverse stock markets in the whole region and has been one of the best performers in the past two decades. A big segment in this market are global leaders in pharma and IT services and (again) it’s what happens in Europe and the US that is important to them. These stocks have performed incredibly well in the past decades as they rose from obscurity to become leading global players.
But there is also a whole cluster of Indian firms that sell anything from soap, toothpaste, paint or jewellery in the vast local market. Most Indians live in smaller cities and towns dotted across the country and it takes a vast distribution network to get products into these villages. Being able to do so is an incredible feat given the huge logistical challenges – in India, each state has its own rules, regulations and potent bureaucracy. Navigating successfully around these local markets allowed these firms to become some of the world’s most profitable businesses.
Key is that this Indian masala of local distributors and global players allows this stock market to sing to its own tune. In 2023, for example, the China A and H markets were down a lot, but India had a stellar year.
Lastly, there is ASEAN – a potpourri of mostly domestic firms in markets such as Indonesia, the Philippines and Thailand. Like in India, the holy grail is to reach consumers spread out across this vast archipelago. Again, no small feat to lorry products around this region, but highly profitable if you can. And like India, these markets also sing to their own tune and are less sensitive to what happens in Chinese or US stock markets. This is exactly what makes these stock markets so attractive.
A quick journey across the region shows how incredibly diverse Asian markets are -from giant tech players in North Asia to small regional retailers of toothpaste in India. This also means that they all move and behave differently; some take their lead from the US, others from China and others again dance to their own tune. So better not to lump them all together. Indeed, quite the opposite; understanding their differences, looking at these markets “from the ground up”, is what makes these Asian stock markets so interesting in the first place.
The opinions expressed are those of the contributor, not of the RSAA.
Read more from Herald van der Linde –
Asia’s Stock Markets, From The Ground Up
This book is a practical guide to Asia’s stock markets for a general audience. It is for people who do not know much about financial markets but, for whatever reason, would like to learn more. They could be seasoned expatriate pilots, academics and other professionals, newcomers in the region as well as students or young men and women about to start in the finance industry.
The idea is to cut through the alphabet soup of industry jargon to provide a clear understanding of how these markets work, how they differ from each other in size and depth, what unique features each stock market has and what drives all the different sectors in these markets – consumers, the internet, banks and technology. The book includes helpful history lessons and personal anecdotes drawn from the author’s 30 years in the world of Asian investments.