By Abishek Vishnoi, Bloomberg Markets Live reporter and strategist
A shift from growth to value stocks is more pronounced in Asia compared to other regions, fueled by concerns about the sustainability of the chip rally.
The MSCI’s gauge for value stocks in the Asia Pacific region has shown a 6% increase this quarter, while its growth counterpart has dropped by 2%, marking its most significant outperformance since January-March 2022, according to Bloomberg data. This gap is wider than what has been observed in the US and Europe during the same period.
This divergence highlights the heavy reliance of Asia’s growth trade on a few chip stocks, which, upon reversing, have led investors to seek more affordable alternatives. Asian value stocks continue to trade at lower valuations compared to both growth stocks and global peers. The regional gauge’s nearly 20% allocation to financials could provide an additional boost from rising yields.
“The shift towards value in Asia is expected to grow and persist as the downward trend in semiconductors is not yet over,” noted Hao Hong, chief investment officer at hedge fund Lotus Asset Management in Hong Kong. “The market has clearly entered a new phase where funds will favor companies with strong growth prospects and track records.”
Value stocks in Asia are currently trading at 10.8 times their one-year forward earnings estimates, in contrast to 17.9 times in the US and 12.3 times in Europe, as per Bloomberg data. The multiple for Asian growth stocks stands at 13.
An increase in bond yields globally could potentially benefit bank earnings by widening lending spreads. This adds another earnings driver to the region’s value trade at a time when growing yields and expectations of Federal Reserve rate hikes are impacting long-duration growth stocks.
During this quarter, MSCI’s financials gauge has risen by 12% in Asia, while the information technology sector, which makes up about a third of the regional index, has declined by 5.6%. This decline was influenced by a recent sell-off in some top-performing stocks over the past year, such as SK Hynix Inc. and Samsung Electronics Co. On the value side, Genscript Biotech Corp. has surged over 150% in Hong Kong this quarter.
Recently, value stocks have been the top-performing investment style in Asia, even on a long-short basis. A strategy of buying undervalued stocks and shorting overvalued ones yielded a return of about 1% in the week ending September 5, while growth stocks were the worst performers with a negative return of -1.3%.
“The attractive valuation and regional resilience of Asian value stocks, which remain undervalued compared to global peers, provide investors with a defensive cushion today and potential for significant gains when risk appetite returns,” stated Hebe Chen, a senior market analyst at Vantage Global Prime in Sydney. “And in Asia, when the momentum shifts, it tends to accelerate rather than crawl.”