(Bloomberg) — Asia looks ready to turn a corner in quarterly earnings growth this results season, and traders are focusing on key themes to make the most of the opportunity.
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The biggest topics include the sharp growth in megacap technology profits, the continued boom in artificial intelligence and improving Chinese payouts. Investors are also watching how earnings in Japan get impacted by the yen’s sharp depreciation while searching for new winners in India’s pricey market.
The MSCI Asia Pacific Index is expected to see its first year-on-year profit growth in eight quarters, with earnings per share rising 4.1% for the period ended March, according to data compiled by Bloomberg. Technology stocks are expected to lead the growth, while utilities are poised to see a turnaround.
“Corporate profit growth appears to be accelerating, creating a favorable view of the outlook for Asian equity markets if based purely on the region’s fundamentals,” said Gary Dugan, chief investment officer at Dalma Capital Management Ltd. “However, the challenge of high US rates and a strong dollar could delay the rally.”
Here’s a look at five key themes to watch as earnings reports roll in over the next few weeks.
AI Boom
Money continues to pour into all things semiconductors on the continued bright outlook for AI applications. That’s providing a windfall for Asia’s tech-dominated markets even as signs of a recovery in broader consumer electronics are keenly awaited.
Taiwan’s Taiex has jumped 16% over the past three months, the best performance among major national equity benchmarks. South Korean stocks notched a record quarterly foreign net inflow of $12.2 billion in the first three months of this year.
Samsung Electronics Co. provided hope for the upcoming results season with a preliminary report showing a sharp rebound in profit on higher memory prices and robust smartphones sales. Taiwan Semiconductor Manufacturing Co., the world’s largest chip foundry, is scheduled to announce earnings on April 18.
Read More: Samsung’s Profit Rebounds With Chip Division Improvement
“It seems increasingly likely that consensus estimates on both the top and bottom lines will be proven overly conservative again,” said Han Piow Liew, the head of equity derivatives at Maitri Asset Management Pte. “They will probably be well beaten, to bring forth another fresh round of upwards earnings revision and consequently support the strong upwards momentum of the AI theme.”
Yen Impact
Japanese companies may have to navigate foreign exchange volatility as global central banks face crucial policy turning points, with the Bank of Japan moving to gradually tighten while the Federal Reserve eventually eases policy. The yen has weakened to a 34-year low, putting traders on alert for intervention by Japanese authorities to defend the currency.
The weak yen has helped Japan’s exporters rake in record profits and drive the Nikkei 225 Stock Average to an all-time high. While major firms including automaker Toyota Motor Corp. and PlayStation maker Sony Group Corp. employ overseas manufacturing and hedging strategies to mitigate forex risk, other companies face larger impacts.
“Our base case is for the BOJ to remain dovish,” SMBC Nikko Securities Inc. strategists led by Hikaru Yasuda wrote in a note last month. “From mid-2024, we think real wage growth and heightened expectations for Fed rate cuts could prompt a shift in focus to domestic demand sectors.”
China Returns
Dividends and buybacks are rising in importance for investors in China stocks after serial earnings disappointments and years of declining share prices.
Chinese companies have been working on enhancing shareholder returns, with some of the country’s largest names increasing payouts after regulator calls to improve governance and prioritize the interest of smaller investors. While most visible among state-run giants, many of the companies paying out more than 50% are high-growth private firms.
A gauge of companies with histories of high dividends has rallied more than 15% this year, on track for its fourth-straight year of outperformance versus the benchmark Shanghai Composite Index.
Read More: Chinese Companies Heed Regulator’s Call as Payouts Increase
Megacap Earnings
The MSCI Asia Pacific Communication Services Index — which features the region’s major internet, telecommunications and videogame names — is expected to show a 136% jump in earnings for the January-March quarter compared with the year-ago period. That’s the biggest increase since the fourth quarter of 2020, according to data compiled by Bloomberg.
That may bode well for the gauge, which stands little changed from where it was at the end of 2022. It would be positive for the broader Asian equity markets as well, as the megacap tech stocks are among the region’s biggest drivers.
China e-commerce giant Tencent Holdings Ltd. is expected to post earnings growth of 37%, rebounding from two quarters of declines. Japan’s Softbank Group Corp. is expected to remain in the black after swinging to a profit in the last quarter of 2023. Both are due to report in May.
India Rotation
With the eight-year rally in Indian stocks showing some signs of fatigue, investors are looking for new drivers. A gauge of potential candidates to join the NSE Nifty 50 Index has seen its forward profit estimates climb 20% so far this year, far outpacing the 4% increase for the larger gauge.
In addition to earnings, another key catalyst may be national elections that begin Friday, with Prime Minister Narendra Modi expected to secure another term as leader of the world’s fastest growing major economy. Stocks in the Nifty Next 50 include industrial and materials firms directly benefiting from that growth.
Read More: Hottest Indian Stock Index Also Has the Best Earnings Potential
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