Japan, India, or China: Which Market Will Lead?

In the financial climate of 2023, Asian stock markets have shown an impressive performance, outshining their counterparts in other regionsAs of December 26, 2024, Japan's Nikkei 225 index has surged 18.24% since the start of the year, while India's Sensex boasts an ascent of 8.63%. Not to be outdone, the Shanghai Composite Index has risen 14.22%, and Hong Kong's Hang Seng Index has enjoyed a robust 17.9% increaseHowever, as we pivot towards 2025, questions loom large regarding the potential risks posed by looming tariffs and the Federal Reserve's tempered interest rate cutsWhat direction will the Asian stocks take in the coming year?

Looking towards 2025, it is apparent that the Asian market remains one of the most attractive playing fields for global investorsCountries such as Japan, India, and Indonesia have been spotlighted by long-term investors and financial institutionsIn a recent interview, Fannie Wurtz, the head of distribution and wealth management at Amundi Asset Management, emphasized that the Japanese stock market is likely to emerge as the favored investment choice in Asia for 2025. Despite challenges like high valuations and headwinds against India's macroeconomic landscape, she indicated that the long-term favorable outlook for the Indian market remains intact

Presently, there is a growing optimism among global investors concerning the Chinese stock marketThe focus is keenly placed on whether consumption can be reignited under new stimulus policies, with domestic consumption expected to excel over external demand.

Japan's stock market continues to be a point of interest for global institutions as they look towards 2025. Factors contributing to this enthusiasm include ongoing increases in wages, the advancement of governance reforms, a sustained weak yen, and a gradual pace of interest rate increasesNotably, Japan is anticipated to be less affected by international tariffs than other markets.

An Asia Investor Survey conducted by Bank of America Merrill Lynch in December revealed that 48% of respondents are net bullish on Japan’s stock market, marking it as the favored investment in the regionNevertheless, the degree of this optimism is rather muted, indicating that while sentiment is positive, it is not overwhelmingly so

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Yao Yuan, the Senior Investment Strategist for Asia at Amundi, conveyed a strong preference for Japanese equities over the next 6 to 12 months, particularly in sectors tied to the domestic economy.

Goldman Sachs' research draws parallels between the political landscape anticipated for 2024 and that observed from 1996 to 2000 in JapanDuring that period, the Liberal Democratic Party (LDP) did not secure an outright majority, yet managed to govern effectively through collaborative effortsThe baseline forecast for 2025 suggests that policymaking processes won't face significant hurdles, allowing for stable governance.

According to Yao, one significant driver behind this bullish sentiment towards Japan is the combination of governance reforms and the resilience of wages in an era of rising inflationCorporate profits are expected to rebound, which, despite the valuation no longer being as attractive as last year—hovering around 14 times earnings—will provide some underpinnings for future growth.

A key component also lies in the foreign exchange dynamics

Earnings results in the second quarter were subpar, with Goldman Sachs noting that profitability revision indices dipped into negative territory in OctoberThis trend is perceived as a temporary dip, primarily linked to the yen's appreciation from July to SeptemberHowever, a rebound in the dollar against the yen since late September has alleviated concerns that a strong yen will hinder corporate earnings.

As it stands, the forecast for the dollar-yen exchange rate from Goldman Sachs predicts values of 155 in three months, 157 in six months, and 159 in a year, suggesting expectations that the yen will continue to weaken over the next twelve months.

In a related commentary, Yao mentioned that the yen's performance typically inversely correlates with the Japanese stock market, and as long as the yen gains are moderate rather than drastic, they are unlikely to dampen market momentum

"We anticipate that the Bank of Japan will not disrupt the prevailing positive sentiment and is likely to raise interest rates two more times in response to rising inflation, which is a positive indicatorHowever, any actions taken will likely avoid aggressive hikes," he noted.

In its December policy meeting, the Bank of Japan chose to hold interest rates steady, with Governor Kazuo Ueda explaining that there was insufficient information regarding wage increases expected during the spring negotiations, and substantial uncertainty surrounding the economic policy of the new U.SgovernmentPredictions hint at a potential 25 basis point increase in January, yet if insufficient wage growth in small to medium-sized enterprises is seen before the meeting or uncertainty around U.Seconomic policies persists, there might be a postponement to March or April, comforting investors worried about a yen appreciation.

Meanwhile, the Indian stock market, which has shone brilliantly over the past two years, is currently navigating through economic headwinds

The long-term growth potential driven by manufacturing upgrades and increased foreign investments initially attracted significant capital inflowHowever, the historically high valuations become a double-edged sword, leading to capital outflows that have begun to shift the market dynamics.

Despite the vast consumption potential in India, concerns loom as the economy exhibits ‘K-shaped’ growth, with high-end consumption thriving while daily goods take a hit in growthNotably, the growth of credit has reached its lowest point in nearly three years, particularly affecting unsecured loans, thus creating uncertainty within the financial sector, leading to diminished investor confidence in financial stocks.

Asset quality deterioration in India's financial system has also escalated concerns around banks' willingness to extend loans, thereby affecting overall economic vigor

Although the Indian government has made strides with several favorable reforms, global factors, including U.Seconomic policies and shifting trade dynamics, could apply additional pressure on India's economyInvestors remain apprehensive about the sustainability of high valuations, particularly against the backdrop of a slowing global economy.

Nonetheless, Yao expresses optimism for the medium to long term regarding international capital's perspective on IndiaHe points out that India's urbanization rate and per capita GDP are at levels comparable to China two decades ago, with the overall GDP being about one-fifth of China's, indicating ample potential for growthThe Modi government has pushed various market-friendly reforms which bode well for India's economic prospects in the longer term.

That said, high current market valuations translate to an adjusted index-weighted P/E ratio exceeding 30 times, meaning much of the positive news may have already been priced in

The focus on domestic demand, compared to China's export reliance, positions India favorably, particularly in service sectors which present attractive opportunities.

Despite a rocky start for Chinese A-shares in 2024, they have ended up performing impressively over the course of the year, ranking within the top 37% of stock market performances over the past three decadesThe MSCI China Index has also demonstrated a strong showing, placing it within the top 30% of similar historical performances.

On a global scale, the Chinese market's recovery has positioned it as a strong contender, only coming second to U.Stech stocks among international listingsThe A-shares market is outperforming many European and emerging market counterparts, including Korea, Saudi Arabia, Mexico, Indonesia, and Thailand, measured in USD.

Despite the uncertainties surrounding potential tariff policy changes in 2025, investor forecasts for the Chinese stock market are considerably more favorable than before

Huang Senwei, a senior strategist at Invesco, shared insights suggesting that China's economy might gradually stabilize against the backdrop of policy stimulus, ushering in a resurgence in corporate profitabilityCurrent consensus estimates project a 13.6% growth in earnings for A-share listed companies in 2025, trailing only behind the United StatesAdditionally, with a current P/E ratio of about 12.9, the Chinese market offers more value compared to the nearly double valuations seen in Indian markets.

Furthermore, there remains significant room for policy maneuvering within ChinaFor instance, in response to potential increased tariffs, strategic currency adjustments could mitigate negative impactsWith China’s consumption still comparatively lower than many developed and emerging markets, there is notable potential to enact policies aimed at boosting consumptionContinued issuance of such policies could therefore act as a cornerstone for economic stability and investor confidence.

Ultimately, the effectiveness of these initiatives hinges on how they are implemented and their tangible impact on the economy

Yao emphasizes that global investors are currently focused on the fiscal specifics of stimulus measures and their implication for consumer behaviorThe ability to rekindle consumption is viewed as critical as it promises more sustainable growth compared to mere infrastructure investments.

The recent exchange and upgrade policies driving up consumption in sectors like home appliances and automotive sales this past September released positive signals indicating that consumer intent to spend still existsAs we look toward 2025, it seems essential that domestic demand becomes a pivotal engine for growth, particularly as external demand is expected to soften significantlySimultaneously, sectors tied closely to domestic consumption will remain in the spotlight, with many institutions eagerly anticipating the unveiling of additional consumer-focused policies ahead of the National People's Congress

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