Amidst China’s market rout, ride on the rise of the New Asian Tigers with these roaring funds.

• As the dominance of China wanes, we believe the stage is set for the New Asian Tigers – South Korea, Singapore, and Japan – to showcase their potential in becoming the new driving forces behind growth in the region.

• We are confident that global chip sales will top 40% year-on-year by 2Q25, which will have a significant positive impact on the South Korean economy and stock market. Investors may consider the JPMorgan Funds – Korea Equity A (Acc) USD.

• The prospect of an improving outlook for semiconductors will also bring positive implications for Singapore’s GDP, which we expect to soar by 4% this year. The Nikko AM Singapore Dividend Equity SGD is a viable choice in the active space.

• Following the impressive rally to fresh 34-year highs, we maintain our optimism for Japanese equities as long-term structural drivers remain in place. Our preferred way to invest in the revival of this market is the Eastspring Investments – Japan Dynamic AS SGD.

China’s stock market rout is seeing no end to the day against the worsening property downturn and waning consumer confidence. Although authorities are mulling plans to ramp up their support, optimism has quickly faded as attention shifts towards the effectiveness and sustainability of rescue measures. It’s evident that band aids don’t fix the substantial challenges at hand.

Despite historically low valuations, we see a lack of positive catalysts that can drive any meaningful turnaround in Chinese equities. At the same time, as the dominance of this Asian powerhouse wanes, we believe the stage is set for the New Asian Tigers – South Korea, Singapore, and Japan – to showcase their potential in becoming the new driving forces behind growth in the region.

(Related article: Riding the Chinese dragon in 2024? It’s no easy feat!)

South Korea: Rising chip demand to fuel economic growth and the stock market

Firstly, the ongoing recovery of global trade conditions would be beneficial for South Korea’s economy, which relies heavily on exports, particularly semiconductors. In December 2023, the country’s headline exports growth rose 5.1% year-on-year, marking the third consecutive month of increase, largely driven by the improvement of semiconductor exports. In addition, the economy grew faster than expected recently, with 4Q23 GDP growth coming in at 0.6%, thanks to an export recovery that more than offset drags in domestic demand.

Although the global semiconductor industry is still overcoming a downturn, we are confident that chip sales will top 40% year-on-year by 2Q25, powered by a new digital revolution where adoption rates of artificial intelligence (AI) are rising rapidly. This will have a significant positive impact on the South Korean economy and stock market.

Furthermore, we note that while the KOSPI has evolved over the decades, Samsung Electronics and SK Hynix continue to be the cornerstones of the index (Figure 1). This reflects the unwavering importance and dominance of these semiconductor companies in the stock market and economy, which is not surprising as the duo collectively commands a market share of over 70% and 50% of global DRAM and NAND chip production respectively.

Figure 1: Samsung Electronics and SK Hynix are the top index constituents

When it comes to investing in developing Asian markets like South Korea, we believe that an active approach makes sense. The region tends to exhibit inefficiencies and greater disparity in the levels of corporate disclosure and transparency, providing active managers with the opportunity to generate ‘alpha’ over the long term.

Among the two Korean equity funds available on our platform, we think the JPMorgan Funds – Korea Equity A (Acc) USD stands out for its track record and high-conviction strategy in identifying value investment opportunities with growth and quality attributes (Table 1). It also comes with a lower expense ratio of 1.80%, versus that of 1.93% for the LionGlobal Korea USD.

Table 1: Three primary attributes that the investment team focuses on

Attribute	Description
Value	Quantitative analysis in evaluating the value and profitability of the company
Growth	Companies that exhibit sustainable earnings growth in excess of the market though an economic cycle
Quality	Companies that possess competitive advantage, reliable management and/or strong financial conditions
Source: JPMorgan Asset Management

The fund is primarily focused on bottom-up fundamental research, and thus would expect to see a significant portion of the alpha generated through stock selection. It typically maintains a concentrated portfolio, with the top 10 holdings comprising nearly 50% of the portfolio. Current positions include major companies like Samsung Electronics, SK Hynix, as well as LG Chem (Table 2).

Table 2: Top 10 positions of JPMorgan Funds – Korea Equity

Company	Sector	Fund
Samsung Electronics	Information Technology	9.8%
SK Hynix	Information Technology	9.6%
LG Chem	Materials	5.3%
Naver	Communication Services	3.8%
Samsung Biologics	Health Care	3.6%
Samsung Electro-Mechanics	Information Technology	3.6%
Hyundai Mobis	Consumer Discretionary	3.3%
SK	Industrials	2.5%
Samsung C&T	Industrials	2.1%
Kiwoom Securities	Financials	2.0%
Total		45.6%
Source: JPMorgan Asset Management, iFAST Compilations Data as of 31 December 2023

Over a five-year period, the fund has generally delivered stronger returns in comparison to the KOSPI and the LionGlobal Korea Fund (Figure 2). Stock selection has typically worked out well for the fund. The top overweight position is in SK Hynix, which outperformed due to an improving memory outlook and a solid positioning in high bandwidth memory 3 (HBM3) chips, which are high-end memory chips used to power AI applications.

Nvidia’s AI accelerators use SK Hynix’s HBM chips extensively, providing the company with an edge over competitors such as Samsung and Micron. SK Hynix’s CEO has expressed optimism, stating that the company’s market value could double in three years amidst the AI memory boom.

Figure 2: JPMorgan Funds – Korea Equity delivered a commendable performance

(Related article: Upgrade South Korea to 4 Stars: New Asian Tiger primed and ready for an export driven rebound)

Singapore: GDP to soar by 4% on the back of an exports-led economic recovery

The prospect of an improving outlook for semiconductors will also bring positive implications for Singapore, an exports-driven economy. The nation boasts a highly skilled and productive workforce, positioning it favourably as a hub for advanced manufacturing. Notably, it plays a pivotal role in the global semiconductor industry, especially in the downstream supply chain, which involves the application testing and packaging of semiconductor products. Singapore commands a notable 20% of the global semiconductor equipment market.

With the recovery in global semiconductor sales, the country’s exports of electronics fell by 11.7% in December 2023 from a year ago, improving slightly from a 12.8% contraction in the previous month (Figure 3). Anticipating a major upswing in electronics demand moving forward, we expect it to be a major driving force behind Singapore’s exports growth. Consequently, we project that Singapore’s GDP would soar by 4% in 2024, surpassing the Ministry of Trade and Industry’s forecast for growth to come between 1% and 3%.

Figure 3: Electronic exports are improving, with a major upswing ahead

Additionally, amid ongoing geopolitical tensions between the US and China, Singapore has reaped the rewards of heightened capital inflows and reallocation to the region, driven by its geographic advantage, transparent legal regimes, and tax incentives.

To capture the opportunities emerging within Singapore’s economic landscape, investors may consider our recommended fund, the Nikko AM Singapore Dividend Equity SGD. The fund distinguishes itself through a portfolio allocation strategy driven primarily by bottom-up fundamental analysis of stocks, with a focus on companies with sustainable dividend payouts, resilient business models, and proven management. This strategy enables it to withstand market volatility over the longer term. Generally, the investment team allocates to two groups of dividend stocks: dividend anchors and dividend growers (Table 3).

Table 3: Types of dividend stocks

Attribute	Description
Dividend Anchors	-          Low gearing -          Strong cashflow streams -          Consistent profitability -          Track record of dividend payouts
Dividend Growers	-          Earnings growth -          Free cash flow growth -          Increasing/low payout ratio
Source: Nikko Asset Management

The fund is managed on a total return basis and does not seek to outperform any benchmark. The top positions include Singapore banks, favoured for their well-capitalised balance sheets and high dividend yields (Table 4). Besides, the investment team prefers selected companies like Sembcorp Industries, aligning with the “New Singapore” narrative that encompasses themes like energy transition.

Table 4: Top 10 positions of Nikko AM Singapore Dividend Equity

Company	Sector	Fund
DBS Group	Financials	8.8%
Oversea-Chinese Banking Corporation	Financials	8.6%
United Overseas Bank	Financials	8.5%
Sembcorp Industries	Utilities	5.6%
Keppel	Utilities	5.0%
Seatrium	Industrials	5.6%
CapitaLand Investment	Real Estate	3.5%
Singapore Technologies Engineering	Industrials	3.3%
Frasers Logistics & Commercial Trust	Real Estate	3.0%
Genting Singapore	Consumer Discretionary	2.7%
Total		54.6%
Source: Nikko Asset Management, iFAST Compilations Data as of 31 December 2023

Relative to the Straits Times Index, we note that the fund has outperformed in recent times. A notable overweight against the index is in Sembcorp Industries, whose shares benefitted from improved financial performance, a rise in dividends, and plans to grow the renewable portfolio as the company positions itself as the preferred vendor in Asia for solar and wind assets. The fund has consistently delivered stronger returns compared to its peers including the Schroder Singapore Trust and abrdn Singapore Equity, making it a great option in the active space (Figure 4).

Figure 4: Nikko AM Singapore Dividend Equity has consistently outperformed peers

(Related article: Singapore’s GDP to soar by 4% in 2024, here’s how to capitalise on this)

Japan: Nikkei 225 surges to a 34-year high, next milestone at 40,000

The Japanese equity market, gauged by the Nikkei 225 Index, experienced a grand start to the year, surging to fresh 34-year highs. Following this impressive rally, we maintain our optimism for Japanese equities as long-term structural drivers remain in place. Based on our estimates, we project that the index would surpass 40,000 by 2025.

Japan’s unemployment rate stood at 2.4% in December, down slightly from the 2.5% in the previous month (Figure 5). The labour market remains tighter compared to historical standards, placing upward pressure on wages. Meanwhile, annual wage negotiations have kicked off, with companies aiming for wage hikes exceeding last year’s historic gains.

Inflation is looking to become more entrenched, which should have positive implications on growth as the country steers away from a deflationary regime that lasted for the better part of the past three decades. The Bank of Japan (BOJ) Governor Ueda has also acknowledged that the probability of achieving the long-term inflation target of 2% is rising gradually.

Figure 5: Unemployment rate is at a historic low

Corporate reforms are making progress as well. As of end December 2023, the Tokyo Stock Exchange (TSE) noted that 49% of companies listed on the Prime section of the exchange (i.e. the market division with the highest listing standards) have responded to requests to improve their capital efficiency. This was considerably higher than the 31% recorded in mid-July last year. We expect the trend of share buybacks and dividend hikes to continue in 2024. Consequently, there is potential to improve return on equity (ROE) and drive a re-rating in equity valuations.

Our recommended fund for Japan is the Eastspring Investments – Japan Dynamic AS SGD. It screens investment ideas that are attractive on an absolute and relative basis based on its long-term valuation criteria like PE ratio and dividend yield (Table 5).

Table 5: Long-term valuation criteria

Attribute	Description
Ratios	PE ratio relative to market and history PB ratio relative to market and history
Yield	Dividend yield relative to market and history
Performance	Price performance over three, five, and 20 years
Others	Broker sentiment and earnings revision analysis
Source: Eastspring Investments

The top holdings feature companies that have implemented restructuring efforts or cost-cutting measures to enhance profitability, such as Panasonic, Honda, and Nissan (Table 6). The investment team is also positive on financials, especially Sumitomo Mitsui Financial Group (SMFG), anticipating benefits for the banking sector as the BOJ gradually shifts away from years of ultra-loose monetary policy.

Table 6: Top 10 positions of Eastspring Investments – Japan Dynamic

Company	Sector	Fund
Panasonic Holdings	Consumer Discretionary	5.8%
Daito Trust Construction	Real Estate	5.8%
Takeda Pharmaceutical	Health Care	5.6%
Ricoh	Information Technology	5.2%
East Japan Railway Company	Industrials	5.0%
Sumitomo Mitsui Financial Group	Financials	4.1%
Honda Motor	Consumer Discretionary	4.0%
Nissan Motor	Consumer Discretionary	3.4%
Nomura Holdings	Financials	3.4%
Sumitomo Chemical	Materials	3.3%
Total		45.6%
Source: Eastspring Investments, iFAST Compilations Data as of 31 December 2023

In term of performance, the fund stands out for its long-term track record in comparison to peers like Nikko AM Japan Dividend Equity as well as the MSCI Japan Index. We do also acknowledge that it has underperformed in recent months as Japanese value equities took a breather (Figure 6). Nevertheless, we believe that the fund’s value-oriented strategy suggests the potential to deliver solid performance amidst the backdrop of elevated inflation and higher bond yields in Japan.

Figure 6: Solid long-term track record despite near term weakness

Related articles:

Japanese equities are entering a new era. Here are some stock ideas you can bank on.

Where to put your money? Here are three equity funds you shouldn’t overlook in 2024.  

Final thoughts

All in all, the uncertainty in Asia – largely attributed to the structural weakness at China – suggest that the New Asian Tigers would play an increasingly vital role as growth drivers in the region. The same can also be said for the role they play in investors’ portfolios. In our view, there are compelling investment opportunities in this group of rising Asian economies, underpinned by an impending surge in global semiconductor sales and long-term structural drivers such as corporate reforms.