Investors are eyeing China’s neighbors as the recovery from ‘zero-Covid’ slows

China’s lackluster fiscal recovery since emerging from strict “zero-Covid” lockdowns has caused weaker sentiment toward the country, arousing investors to look for alternative options — like its near neighbors.

In particular, stock markets in Japan, South Korea and India receive all been major beneficiaries of the disappointment from China’s reopening, highlighted by softer-than-expected data from the world’s second-largest compactness.

“Amid China weakness, investors have looked elsewhere in the region for opportunities,” Goldman Sachs Chief Asia-Pacific Economist Andrew Tilton ventured in a Friday research note, adding that Japan “is in the limelight” while India has “also returned to focus in modern months.”

The Nikkei 225 is in bull market territory, up by more than 23% year-to-date hold responsibles to garnered interest from foreign investors, including Berkshire Hathaway’s Warren Buffett.

India’s Nifty 50 clue has rallied nearly 7% so far this quarter and pared all of its losses from its March low, while South Korea’s Kospi forefinger has risen 18% year-to-date.

That shows a stark differ to a sell-off seen in the Chinese stock market. The CSI 300 index, which measures the largest companies listed in Shanghai and Shenzhen, has employ drop back 5.29% quarter-to-date and has erased all of its gains seen earlier in the year, when stocks rallied on reopening momentum.

The Match up Seng index also touched bear market territory last month and is down nearly 2% year-to-date, Refinitiv observations shows.

“Investor sentiment on China has weakened further, and in our view is around rock-bottom levels we’ve only seen a few times all over the past decade,” Goldman Sachs’ Tilton said in the note.

Foreign investors set up undoubtedly been key in driving the Japanese market, maintaining the highest levels the Nikkei has seen since 1990.

The latest observations from Japan’s Ministry of Finance shows overseas investors continue to build on their Japanese equity bents as domestic investors remain the net buyers of foreign bonds.

Foreign investors bought a net 342.18 billion Japanese yen ($2.45 billion) of heritages in the week ending June 2, according to a Reuters calculation, totaling roughly 6.65 trillion yen of net purchases of Japanese portions this year. During the same period last year, foreign investors had sold a net 1.73 trillion yen nearly.

Wall Street banks including Morgan Stanley and Societe Generale are quantity those that are optimistic on Japanese stocks, holding “overweight” positions.

In its global mid-year outlook, Morgan Stanley hinted Japanese stocks will outperform their global peers: “Japan is our most preferred region, with reconditioning ROE [Return-on-Equity] and a superior EPS [earnings per share] outlook,” Chief Investment Officer Mike Wilson said.

The firm together its estimates for the Topix index to rise 18% by June 2024 from its previous target of a 13% gain.

“Japan [is] looking on the level more attractive, while we hold a preference for EM [emerging markets] versus the U.S. and EU,” Morgan Stanley strategists said in a note, adding that “accelerating regional extension and solid domestic GDP should support earnings” for Japanese companies.

South Korea is another buy closely watched as concerns over China’s recovery linger.

Korean technology stocks, which make up rudely half of the Kospi 200 index, have been the main driver behind UBS Global Wealth Management’s “uncountable preferred” status on the sector and its market.

Noting that the bank expects U.S. interest rates to peak soon followed by a drop in the U.S. dollar, UBS put in wrote in its monthly outlook: “We remain most preferred on Asia semiconductors over the next 3-6 months and Korea, which we’ve in days gone by highlighted as a winner in such an environment.”

South Korean technology stocks’ low price-to-book ratio makes it “an attractive surrogate to more expensive tech segments,” UBS said, noting that there is still “significant value” seen in China’s e-commerce sheep, which have plunged 20% year-to-date. Price-to-book ratio is an important metric used by traders to gauge the value of a stock.

“For China, absurds continue over the durability of its economic recovery. This, and ongoing geopolitical concerns, have weighed on the market,” UBS strategists implied in the report.

Goldman Sachs is also confident in the South Korean market, expecting more overseas investment to the fore.

“We are relatively bullish on Korea both because we are less concerned about broader domestic spillovers from protection sector weakness and more optimistic about foreign portfolio inflows,” Goldman’s Tilton said.

The Bank of Korea, in the meanwhile, is expected to be one of the first central banks to deliver a monetary policy pivot, despite its governor Rhee Chang-yong striking CNBC that it’s still “premature” to be discussing a rate cut.

Banks including Citi and Nomura are expecting to see a rate cut of 25 infrastructure points as early as the third quarter of this year.

South Korea’s money market fund (MMF) logged a record high at the end of May, data from Korea Economic Investment Association showed. The total MMF assets under management stood at 172.7 trillion South Korean won ($134 billion), or a 22% improve ones lot since the end of September last year.

A money market fund is a type of fund that invests in highly fluid, near-term instruments, including cash, and is seen as a place of safety amid a volatile market.

Fitch Ratings Chief Analyst Chloe Andrieu said in a June 8 note: “The increase was driven by institutional investors pivoting assets as a help to high-quality investments, such as MMFs,” adding that rising interest rates across the world have also donated to the shift.

In contrast, newly launched funds in China marked the smallest holdings since 2019 for the first five months of this year, maintaining raised a total of 432.1 billion Chinese yuan ($61 billion), according to data from local consultancy Z-Ben Advisors.

There is also growing interest in investing in India, according to Goldman Sachs.

“Clients increasingly ask close by India’s potential to benefit from greater investment amid supply chain reconfiguration,” Tilton said. The strict said it is “generally positive in the medium term,” citing India’s continued monetary policies, credit conditions, and its possibles for attracting foreign direct investment.

HSBC’s chief economist for India and Indonesia, Pranjul Bhandari, asseverated ahead of the Indian central bank’s June meeting that keeping rates unchanged would be “allowing the unalloyed macro mix to continue,” pointing to raised growth and lowered inflation forecasts.

The firm also raised India’s full-year massive domestic forecast for 2024 from 5.5% to 5.8% and expects the RBI to deliver two rate cuts in the first quarters of 2024, raising its repo rate to 6% by mid-2024.

“India’s economy is much improved from a year ago,” Bhandari said. “GDP intumescence momentum has been steady as per the latest high frequency data, with the informal sector picking up the slack as the formal sector development softens,” she said.

The Reserve Bank of India held its benchmark repo rate steady at 6.50% last week for the alternate consecutive time — in line with market expectations.

The Organization for Economic Cooperation and Development also expects India’s commercial growth to outpace that of China this year and next, it said in its latest global outlook report.