2 Asian Markets to Help Avoid Inflation and Fed Ripples

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Global markets are anything but smooth these days, roiled by a motley mix of tensions over Ukraine, the never-ending inflation debate—just how bad is it, really?— and nerves over when and by how much central banks, especially the Federal Reserve, will raise interest rates.

The effect is clear: The iShares MSCI All-Country World Index ex-USA (ticker: ACWX) is down 2.7% so far this year, though it’s off less than the S&P 500’s 5.5%.  

Asian markets haven’t been immune but are performing better on average than developed markets, driven more by specific stocks than the world economy, according to Puneet Singh,

Société Générale

‘s quantitative strategist.

And within Asia, two markets—India and Japan—are particularly worth a closer look because they appear to be driven by local rather than global macroeconomic concerns, Singh writes in a research note.

Japan has been a laggard, eking out just 1.5% over the past year. But Masa Takeda, manager of the Hennessy Japan Fund, is gravitating toward companies with the wherewithal to weather challenges, including supply-chain disruptions. That includes automation sensor developer Keyence (6861. Japan), whose direct sales-channel strategy let it secure enough parts supply, and surpass its record operating profits by 25% last quarter.

Being a conglomerate also helped offset the hit, with Takeda noting that

Sony Group

(SONY) was able to improve profitability by offering more premium products. The company has also invested in a joint venture with Taiwan Semiconductor Manufacturing (TSM) to build its first chip-making factory in Japan.

Though Takeda typically doesn’t invest in turnarounds, he is optimistic in the restructuring under way at Sony as it tries to move from primarily low-margin consumer electronics hardware into more creative entertainment. The areas such as intellectual property content that new chief executive Kenichiro Yoshida is strengthening, Takeda notes, point to an “encouraging sigh the company has a long runway to grow moving forward.”India’s market was a big winner last year, with the

iShares MSCI India
exchange-traded fund (INDA) up 15%. Some money managers had even taken a pause as valuations have climbed. But India just released its latest budget that is filled with pro-growth spending that should bolster growth, adding to the draw to the country for money managers.

“The budget was very investment-focused and not filled with handouts that the market doesn’t like,” says Todd McClone, William Blair’ emerging markets growth manager, who has favored financials and industrial companies in India.India is also benefiting from reopening. The country, like many other developing ones, has been slower to recover from Covid-19, and managers like Patricia Ribeiro, who oversees the

American Century Emerging Markets Fund,
sees opportunities in sectors like financials that can benefit as the economy recovers. Two Indian banks—

HDFC Bank

(HDB) and

ICICI Bank

(IBN)—are among the fund’s top holdings.

So, yes, global markets are bumpy. But there are still options out there that appear to be more insulated.

Write to Reshma Kapadia at reshma.kapadia@barrons.com