Opportunities in Asian Markets: Critical Analysis for 2024

When Benjamin Graham stated that high quotations increase risk while low ones reduce it, he was possibly thinking of situations like the current one in Asian stock markets. With corrections exceeding 40% in major indices since 2021, these markets present a complex but potentially attractive outlook for attentive investors.

The current scenario: Unprecedented decline

Asian financial markets are undergoing a severe revaluation phase. The main stock exchanges in China have recorded accumulated losses of approximately $6 trillion in market capitalization since their 2021 highs. The numbers speak for themselves: the China A50 index fell 44.01%, Hang Seng plummeted 47.13%, and Shenzhen 100 lost 51.56%.

What caused this debacle? A combination of structural and cyclical factors:

• Previous health policy mismatches that severely impacted economic activity
• Intensified regulatory restrictions on leading tech corporations
• Real estate crisis in the sector supporting a large part of the economy
• Global demand contraction resulting from the global economic slowdown
• Trade frictions, especially in advanced technology supply chains

China’s economic growth has slowed to modest rates, reaching 5.2% in the last quarter of 2023, far from the double digits that characterized previous decades. Foreign direct investment is retreating, while manufacturing shifts toward alternatives like India, Indonesia, and Vietnam.

Demographic and structural dynamics

Long-term challenges transcend short-term economic cycles. The Chinese population is aging rapidly with depressed birth rates, projecting a possible demographic decline that will increasingly pressure the labor market. This phenomenon is not exclusive to China but is particularly pronounced there.

The Asia-Pacific region, home to the main Asian markets, also faces:

Geopolitical instability: Tensions in the Korean Peninsula, South China Sea, Taiwan Strait, and India-China are latent factors that could escalate into trade or military conflicts, disrupting regional cooperation.

Climate and environmental pressures: The area is vulnerable to extreme weather events and accounts for about 50% of global greenhouse gas emissions, requiring transitions to renewable energies that impact production models.

Demographic gaps: Migration, accelerated urbanization, and skills mismatches exert pressure on social security and productivity.

Economic policy responses

Chinese authorities have begun reacting to the adverse scenario. The People’s Bank of China announced a reduction of the Reserve Requirement Ratio by 50 basis points, freeing approximately 1 trillion yuan (139.45 billion dollars) into the economy.

Even more significant, a stabilization package of 2 trillion yuan (278.90 billion dollars) is being discussed, coming from offshore funds of Chinese state-owned enterprises, aimed at halting massive sales through sustained stock purchases.

Simultaneously, preferential credit rates have been maintained at historic lows around 3.45%. The country is experiencing deflationary pressures, an indicator of contracted domestic consumption that these measures seek to reverse.

However, delays in implementation and apparent disconnects between different initiatives raise questions about their sufficiency to restore economic dynamism and stem the bleeding in the stock markets.

Size and composition of Asian stock markets

China dominates with three main exchanges: Shanghai Stock Exchange leads the region with $7.357 trillion in market capitalization, followed by Shenzhen with $4.934 trillion and Hong Kong with $4.567 trillion. Together, these Asian markets total $16.86 trillion.

Tokyo maintains $5.586 trillion, India and South Korea are significant players, while Australia and Taiwan complete the largest exchanges. These Asian markets include thousands of listed companies: Shanghai and Hong Kong host over 6,800 firms, Bombay exceeds 5,500.

Despite their magnitude, Asian markets account for only 12.2% of the global combined capitalization, far from the 58.4% held by the United States. Although China has achieved a notable rise, its role as a state-controlled economy could limit future growth prospects in local markets.

Technical outlook of main indices

China A50 Index: Tracks 50 top A-shares from Shanghai and Shenzhen. It has been in a downtrend since February 2021, when it reached a high of $20,603.10. Currently trading at $11,160.60, well below the 50-week moving average of $12,232.90. The Relative Strength Index fluctuates below the mid-zone, indicating consolidation in a bearish phase. Key support at $10,169.20 and resistance at $15,435.50.

Hang Seng: Capitalization-weighted index tracking the largest companies in Hong Kong, covering 65% of total capitalization. Its behavior mirrors the A50, trading below the downtrend and the 50-week moving average. RSI shows bearish consolidation. Current level at HK$16,077.25 with potential movement toward HK$10,676.29.

Shenzhen 100: Measures the 100 main A-shares in Shenzhen. Downtrend since February 2021, with a high of 8,234 yuan. It trades at 3,838.76 yuan with RSI near oversold levels. Supports at 2,902.32 yuan and resistance at 4,534.22 yuan.

Hourly considerations for traders

Those trading Asian markets from Europe should consider time differences and overlaps. Madrid (CET/GMT+1) versus Tokyo (GMT+9) maintains an 8-hour difference, while Shanghai, Shenzhen, and Hong Kong (GMT+8) vary by 7 hours.

Optimal Asian overlap occurs between 2:30 and 8:00 a.m. Madrid time, when the four main markets are simultaneously open, ensuring volume and liquidity. This time window offers significant opportunities for traders and investors from other regions.

Investment strategies in Asian markets

Direct access: Buying shares of Chinese corporations listed on Western exchanges through conventional brokers. Companies like JD.com (156 billion dollars revenue 2022), Alibaba, Tencent, BYD, and Pinduoduo provide exposure. State Grid, China National Petroleum, and Sinopec lead by revenue but face restrictions for foreign retail investors.

Indirect access via derivatives: Contracts for Difference (CFDs) allow speculation without acquiring the underlying asset, operable through specialized platforms in Asian markets.

Conclusion: Watch for stimuli and policies

Asian stock markets are undervalued and could turn into opportunities if monetary, fiscal, and regulatory stimulus policies succeed in restoring economic dynamism. The key is to monitor announcements from Chinese authorities and the evolution of measures implemented. Although structural challenges are evident, the recovery history in these regions suggests that favorable political changes could catalyze significant movements in these markets.