Market Views: Will China, India, or Japan come out on top in 2024?

Japan’s record stock rally continues. India's market performance shines. And anticipation builds for China's overdue comeback. Which market will fund managers pick as a favoured investment destination for the new year?
Market Views: Will China, India, or Japan come out on top in 2024?

The performance of Asia's three largest economies – China, Japan, and India - have been dominating headlines in 2023 for very different reasons.

China’s economic recovery disappointed following its reopening. The country's property crisis continued depressing investor sentiment.

India, among other Asian economies, benefited from capital outflows from China. Its strong corporate earnings also presented valid reasons for investors to be bullish.

Japan remains one of the few developed markets in the world to operate under ultra-low interest rates. Its stock market outperformed throughout 2023 into the new year. The Topix index kept hitting record high this week amid yen weakness and falling bond yields.

Heading into 2024, investors are curious about whether Japan and India can sustain their winning streaks. There is also speculation regarding the possibility of China regaining momentum should its economic recovery firm up.

This week, we asked fund managers to rank these three markets in terms of favoured investment destinations, and to evaluate their structural opportunities and risks for the year ahead.

The following responses have been edited for clarity and brevity.

Aninda Mitra, head of Asia macro and investment strategy
BNY Mellon Investment Management

Aninda Mitra

We think 2024 will be a year when major economies slow down more meaningfully even as geopolitics remain unsettled. In this context, Indian markets will continue to do quite well.

Elevated price-equity multiples may seem a barrier to further outperformance.

However, versus other Asian peers, Indian corporates’ strong earnings growth, a downtrend in leverage, further supply-chain rotation, modest Reserve Bank of India (RBI) policy easing and the likelihood of Bharatiya Janata Party-led political continuity, as well as prospective pipeline of reform, make us optimistic.

Japan has begun encountering some external headwinds and the recent earthquake may result in some short-term stumbles.

But underlying improvements in services activity, firmer nominal wage growth, strong corporate balance sheets - with globally diversified sources of earnings- and a pick-up in their capex plans as well as a cheap currency should underpin enough upside growth and earnings momentum for another year of best-in-class equity performance in Asia Pacific.

Finally, on China, we have grown more concerned about a deflationary trap which will keep nominal growth restrained to around four percent and which fundamentally limits much upside for Chinese equities.

That said, Chinese equities have cheapened no doubt.

Moreover, short positioning may seem overdone. We could even see some short-squeezes and occasional rallies.

But amid a tepid stimulus response, limited prospects of a big turnaround in the property sector and worsening trade and geopolitical issues with key trading partners, we struggle to see upside catalysts for a sustained rally.

Over time, China remains advantageously positioned to capitalise on its prowess in clean energy and breakthroughs in semiconductors. These limit much further downside.

However, it is not obvious that these can drive a sustained upturn in China’s macro prospects or equity markets anytime soon.

Raf Choudhury, investment director of multi-asset

Raf Choudhury

We see reasons to invest in all three markets but if ranking the three markets as long-term investments, it would be India, Japan and then China.

We have existing overweight positions in India as well as Japan although that is a more recent addition. China is also a market where we have a smaller overweight position.

Key drivers in India are growth and earnings.

Macro growth divergence is expected to widen further versus the rest of the world.

We expect India to maintain the current growth trend of 6% over the next two years and expect additional fiscal stimulus given it’s an election year.

The equity story is driven by domestic earnings which we expect to significantly outperform supported by a strong outlook on the banks.

Behavioural drivers are also supportive as sticky systematic inflows from domestic investors continue to grow while foreign inflows are also positive thus far given it’s a safe haven from the US-China geopolitical tension.

As for Japan, our fundamental view on Japan equities is constructive and we see the current weakness presenting a buying opportunity.

The rapid yen appreciation has been a bit of a headwind that has dented sentiment a tad but foreign investor buying should resume.

The bottom line is we have a very strong macro and micro earnings backdrop that is supported by resilient inflows from foreign investors as well as a resurgence of corporate buybacks.

China’s November data releases provided further evidence that policy easing to date is gaining traction. Month-over-month gains in services and industrial production were strong.

However, it will be hard to turn market confidence without addressing the twin headwinds of household confidence and the health of the housing market.

Sylvia Sheng, global multi-asset strategist
JP Morgan Asset Management

Sylvia Sheng

Moderate growth, cooling inflation and less restrictive policy should be generally supportive to asset markets in 2024.

We upgrade equities to a modest overweight with a preference for Japan equities, driven by above-trend economic growth in Japan, limited headwinds from the yen and light positioning.

We expect Japan’s growth momentum to reaccelerate in 2024 after a soft patch in the second half of 2023.

Private consumption will likely rebound, supported by stronger wage growth and a one-off tax refund of almost 1% of GDP.

Capital expenditure intentions remain upbeat, as indicated by the Bank of Japan’s (BoJ) Tankan survey in December.

We anticipate that investments in labour-saving technologies (driven by worsening labour shortages), as well as investments in environmental and digital projects, will likely drive capex demand going forward.

The Tokyo Stock Exchange’s reforms to improve corporate capital structure and boost shareholder returns should also continue to support valuation expansion.

Further yen appreciation is a key downside risk, but we think that the currency is already near fair value.

On the sector level, we like financials, as the BoJ is likely to exit from its negative interest rate policy, which will help improve banks’ net interest margins.

Vikas Pershad, Asian equities portfolio manager
M&G Investments

Vikas Pershad

On the heels of the best year for Japan’s market in a decade, we remain of the view that prospective returns for Japanese equities will lead the region.

When we look beyond the yen, weakening demand from the China end market, and politics (both domestic and global), we see a long-term structural opportunity that remains intact.

Market returns will be driven largely by earnings growth, which could approach 10% per year.

Coupled with increasing dividend payout ratios and more frequent buybacks, Japanese equities could compound at low- to mid-teens percentage rates for the next few years.

Valuation re-ratings, which would be justified, would provide a further fillip to returns.

There are country-specific factors driving broad sectors of the market. In 2023, the Tokyo Stock Exchange publicly applied pressure on “underperforming companies” to streamline operations and improve returns on capital, with the aim to improve shareholder returns.

This led to a significant outperformance for companies typically tagged as “value opportunities”. This factor might manifest in 2024 as well.

In the technology industry, Japan’s commitment to bolstering the semiconductor sector should continue to support valuations, earnings and consolidation opportunities for many companies that are world leaders in their areas.

For investors interested in the energy transition theme, Japan is a fertile ground for opportunities. We estimate that one-third of the large-cap benchmark in Japan, excluding financials, has energy transition as an underlying business thematic.

In 2023, these stocks outperformed the broader market by nearly 600 basis points. An overweight positioning in companies with world-leadership positions in energy-transition technologies or assets seems sensible.

Luca Paolini, chief strategist
Pictet Asset Management

Luca Paolini

2024 will be a good year for investors to focus back on country and sector fundamentals, take a defensive approach, with a preference for quality stocks, a higher weighting to sovereign bonds and selected investment grade corporate bonds.

In Asia, we see potential in Japan, where earnings revisions have held up better than elsewhere in the developed world, and tailwinds of positive corporate governance reform and the economy breaking out of deflation remain in place.

With a strengthening economy, improved governance and stronger incentives to spend balance sheet cash, the investment case for Japan Inc looks very compelling.

When it comes to emerging economies, valuations for stocks are relatively attractive. However, we have to balance this against growing geopolitical risks and uncertainty over China – in terms of both the outlook for the all-important property market and potential for the trade friction with the US remaining on top of mind for investors.

We therefore prefer to hold emerging markets exposure via bonds rather than stocks.

Given the risks stemming from China and beyond, we believe it’s prudent to include some high-quality defensive positions within a portfolio.

On the fixed income side, while we see global bond yields dropping a little more from here, which should deliver investors a 3-4% total return, similar to last year.

Investors should avoid Japanese government bonds in particular as the BoJ appears set to normalise its monetary policy, ending negative interest rates in the new year before raising short-term borrowing costs over the course of 2024.

Yang Zijian, head of multi asset Asia Pacific
Allianz Global Investors

Yang Zijian

Japan is our top preference now. We favoured Japan throughout 2023 and continue to like it going into 2024.

Firstly, Japanese companies are among the few in developed economies still receiving support from lower interest rates, albeit the BoJ’s monetary policy seems set to move from negative rate to zero rate.

Secondly, Japan equity presents structural opportunities thanks to ongoing reform of its listed companies.

With earnings staying resilient, we think valuations are also modestly attractive at current levels.

Critically, equity market in Japan boosts a heathy breadth, with more stocks participating the rally instead of being concentrated on the top names, such as the case in the US.

We see this as a sign of resilience for the market to continue outperform going forward.

There has been a remarkable shift in the Indian market due to its stellar growth, strong political mandate, and unparalleled demographic dividend.

We see ample opportunities in 2024, as corporate India enjoys capex cycle recovery driven by government initiatives and company balance sheet resilience.

Furthermore, India’s domestic flows into capital market surged to approximately 2.8 times that of foreign portfolio inflows, significantly reducing the volatility and correlation of Indian equities with the broader emerging market.

This trend is set to continue, due to ongoing financial reforms, the rise of younger investors, and the growing recognition of equity within the expanding Indian middle class.

Indian market has always traded at higher valuations comparing to its emerging market peers due to its higher return on equity and superior protection of investor rights. We would therefore advocate an active approach for best growth potential and diversification.

We remain neutral on China as we continue closely observe key policy developments, especially on the real estate sector. 

Michele Barlow, APAC head of investment strategy and research
State Street Global Advisors

Michele Barlow

Given different drivers, we focus on our favoured markets for both emerging and developed markets.

We maintain a constructive outlook on Japan in developed markets even after the rally in 2023. 

The pick-up in Japanese inflation allows corporations to lift prices and increase profitability and growth. With the “shunto” negotiations [on annual wage] expected to deliver higher wages (a key factor for inflation), consumers may be encouraged to spend.

In addition, the Tokyo Stock Exchange’s call for companies to improve corporate governance and capital efficiency still has more room to go and could continue to attract overseas investors. 

Japan’s next 12 months earnings per share (EPS) have been quite strong but could be impacted by a stronger yen.

The financial sector should benefit from a rising rate environment while the information sector and select consumer discretionary companies could see their earnings improve from a pick-up in consumption.

We favour India in Asian developing markets.

The economy is expected to grow strongly, albeit at a modestly slower pace than 2023. The manufacturing sector is benefiting from government support, through incentives to boost local investment, and from foreign direct investment as overseas companies look to diversify their supply chains. 

Demographics, rising incomes and urbanisation should also support consumption growth over the medium to longer term. India’s next 12 months EPS have remained strong relative to the broader emerging markets.

Consumer discretionary companies with large distribution and solid brands along with financial companies with strong retail lending franchises should benefit from a supportive economic outlook and the rise in domestic consumption.

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