A disciplined approach to valuation can pay dividends in Asian markets

Valuation is the analytical process of determining the current or projected worth of an asset or company. Within the Asian & Emerging Markets Equity team, we employ fundamental analysis to uncover a firm's intrinsic value. This involves examining various metrics, including a company's financial statements, management quality, capital structure (the mix of debt and equity that fund a company's operations), future earnings potential, and the market value of its assets, alongside broader economic indicators. We believe this approach is the most effective way to ascertain a firm's true worth.

When you buy into businesses or industries that are facing temporary challenges, you increase the odds of buying them for much less than they’re worth. This can sometimes feel uncomfortable, but we believe focusing on the balance sheet strength of a company, for example the balance between outgoings versus income, can offer reassurance that there is some mitigation against potential risk of loss in an investment. Meanwhile, the potential return from capturing emerging trends or turnaround stories before others do can be very rewarding.

It’s about getting value for your money

Valuation is our number one priority when considering an investment. When there’s lots of negative news around, it can often be a good time to buy, which might seem counter intuitive.

But just like buying branded clothing when it’s on sale, this doesn’t mean investing in bad companies. Quite the contrary – we simply acknowledge that companies go through cycles, and human psychology or emotion can push the market into overly negative territory, where perception is, we believe, a far cry from reality. In other words: markets are often irrational, and herd mentality can cause assets to be mispriced.

The importance of a well-established philosophy and process

Being a valuation driven investor requires discipline and, at times, a willingness to go against the market. It also requires a deep understanding of the market, the specific asset, and the underlying fundamentals.

We do the fundamental work and speak with company management to gauge where consensus is wrong. This gives us the confidence to lean into this perceived risk and buy potentially mispriced assets. The other side of the same coin is to avoid expensive assets during periods of euphoria.

The more complex and unpredictable the market backdrop, the more volatile and favourable the environment can be for valuation driven investors. This is what we think makes Asian markets such a particularly fertile hunting ground for opportunities.

What’s your outlook for Asian equities in 2025

While investors will remain mindful of geopolitical risks, the double-digit earnings growth outlook and reasonable valuation levels across much of Asia are compelling going into 2025. The market delivered good returns in 2024 with global central banks cutting interest rates, corporate earnings delivering, and markets being enthused by India and the AI supply chain. Fundamentals across the asset class remain healthy, and the implementation of China’s stimulus measures provide the potential for higher-than-expected positive returns in 2026. Significant valuation disparity across markets, and genuine improvements in shareholder return policies provide fertile ground for active stock pickers.

What are some of the main areas of opportunities you’re seeing in Asia and emerging market equities?

World leading manufacturing and technology companies in North Asia include those providing essential tools and component parts to develop and implement AI. China, India, Southeast Asia are the hotbeds of consumer demand growth, including innovative internet and e-commerce businesses. Exposure to rising incomes and a growing middle class is also accessible through well capitalised financials. Asian markets have some of the most exciting investment opportunities in the world and can provide diversification benefits within an overall portfolio.

Which sectors will you be keeping an eye on in 2025?

Given the disparity in valuations across markets and sectors, a selective approach is recommended. There are signs of exuberance in Indian equities and parts of Taiwan tech but there are compelling opportunities across markets in consumer-related sectors including e-commerce, internet, financials, and leading manufacturers across the technology supply chain and transportation.

Key Risks:

Geopolitical tensions, trade disruptions, global inflation, and currency volatility are key risks. However, robust fundamentals, healthy balance sheets, and reasonable valuations could make emerging markets a valuable contribution to portfolio diversification.