Asia's stocks ride reform wave, but rough seas ahead

Asia's stock markets are finally fighting back.

- Manishi Raychaudhuri

A photo dated July 31 shows a bystander looking at a screen and a ticker displaying falling stock prices at the Bombay Stock Exchange building in Mumbai, India.

(BLOOMBERG)

The region's flagship index has jumped more than 25% this year, outpacing the S&P 500's roughly 16% gain, as a wave of governance reforms and fresh domestic money has started to chip away at a decade-long valuation gap with the US.Asian equities still trade at very low valuations relative to the US, however, meaning there could be room to run. But that may require the region's governments to tackle some politically challenging reforms. Enthusiasm for artificial intelligence has played a role, but a key catalyst has been corporate governance reforms.

Regulators throughout North Asia have pushed for a greater focus on shareholder value. They have encouraged companies to return excess cash to investors, trim balance sheets and lift return on equity (ROE). China kicked things off in January 2023 when the state-owned assets regulator SASAC overhauled key performance indicators (KPIs) for state-owned enterprises (SOEs). Operating margin and net earnings were replaced by ROE and operating cash flow, with “market value management” added a year later. Listed Chinese companies have been encouraged to follow suit.

The Chinese securities regulator CSRC then sought to improve investor payouts. First, in August 2023, it restricted controlling shareholders of listed companies from selling shares in the secondary market if the company had not paid significant dividends over the previous three years. It then relaxed buyback rules in December 2023 and, in March 2024, urged companies to establish buyback plans.