Analysis: The impact of AI and EVs on Asia's equity markets

Performance disparities among tech stocks have left investment strategists in an awkward position, leaving them to balance structural drivers with near-term headwinds.

August 20, 2024

Asian indices have mirrored the market’s upward trend this year, concluding the first half on an upbeat note. The MSCI Asia Ex-Japan index has rallied nearly 10%, driven by technology stocks which account for a third of the index.

Taiwan’s TSMC and Korea’s Samsung Electronics, chipmakers which together represent half the sector’s exposure, have contributed positively. TSMC’s share price has almost doubled while Samsung Electronics recovered from an early year loss to return gains to investors.

Demand for artificial intelligence (AI) applications continues to drive the rally, notes Hani Abuagla, senior analyst at XTB MENA, an online broker, speaking to FinanceAsia. Taiwanese and Korean companies are reporting solid profit margins alongside robust operational cashflows, Abuagla explains, underscoring the AI thematic appeal, but adds that the rise in market valuations is exceeding its earnings growth, exposing technology heavy indices like the S&P 500 to a price correction.

However, even as those metrics intensify, Susan Gim, an institutional portfolio manager at global equity specialist Martin Currie, points out that technology stocks, over the longer term, have outperformed other industries within emerging markets (EM). This success underscores the strategic use of indirect or proxy names from less expensive markets that align with similar themes.

“EM technology companies provide investors with a diverse range of opportunities and are currently trading at materially lower valuations than US peers,” wrote Gim in a client note distributed by Franklin Templeton, arguing that growth stocks within the technology sector are well placed to lift EM after underperforming for three consecutive years.

Timing a potential sector rotation

Equities untethered with AI applications have lagged year to date, prompting discussions among investment strategists whether it is time to take profits from outperforming graphics processing units and server equipment makers, and now rotate into underperforming areas within the technology space.

Any overly negative short-term outlook could create openings to acquire quality companies with strong business models and solid prospects for future growth, comments Rob Hinchliffe, head of global sector cluster research at PineBridge Investments, wrote in a note to clients.

Among industries with visible structural tailwinds, Hinchliffe highlights green technology manufacturers, like electric vehicles (EV), as a potential rerating opportunity. Sentiment towards the sector does not reflect reality, Hinchliffe believes, since Asia remains the dominant market.

“China is in a position to leapfrog the rest of the world, moving full steam ahead on both vehicle production and battery powering,” Hinchliff writes, explaining that this benefits businesses with proportional exposure to China, notably Korean EV battery producers.

EV stocks 

Chinese EV stocks have struggled this year, as intense competition has suppressed selling prices and tightened margins. But while automakers like BYD have managed to buck the trend, returning a fifth to shareholders from early year lows by closely matching Tesla cars sold in China, policy concerns still overhang.

Back in May, the US announced new tariffs on Chinese made EVs, which were later matched by additional charges laid by the European Commission. That anxiety is being fuelled by overcapacity concerns emanating out of China, according to a research note by Ivy Ng, Apac chief investment officer at DWS. 

“Market consolidation is widely expected, and the competition among automakers is likely to extend beyond the price and quality of the EVs and towards their balance sheet strength,” she said.

Analysts like XTB MENA’s Abuagla argues that diversifying across tech sub-segments mitigates risks and provides balanced exposure to the broader Asia tech sector. PineBridge’s Hinchliffe echoes this view, believing that when looking at the remainder of the year, the timing is favourable to tap companies that may face short term hurdles but benefit from enduring structural tailwinds, suggesting possible green shoots in the EV space.

One such shoot is the continuation of the Chinese government's Rmb20,000 ($2,760) subsidy to scrap old, higher emissions vehicles for a more efficient cars.  

But these concerns are enough to keep investors sidelined for the moment. With the Philadelphia Semiconductor Index having risen 50% since last June, investors seem hesitant to rotate out of a winning strategy, especially within AI’s secular growth story, notably pick and shovel proxy stocks like chipmakers that uphold faster computing providers.

Investors agree about the valuation trade-offs, but funding those opportunities will unlikely come from taking profits in the AI names. At least not yet, suggesting perhaps a preference to rotate into different markets under the same thematic, than within the technology sector itself, reflecting how innovation is never restricted by any border.

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