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Our Chief Asia and Emerging Market Equity Strategist reviews an up-and-down first quarter for markets across the region, and gives an update on which sectors investors should be eyeing. 

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Welcome to the Thoughts on the Market. I\\u2019m Jonathan Garner, Morgan Stanley\\u2019s Chief Asia and Emerging Market Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about our key investment views in Asia. It's Tuesday, Mar 19th at 9 am in Singapore.

It's been quite a first quarter in Asian equities with a wide degree of dispersion in market returns. At one end of the spectrum Japan\\u2019s Nikkei index is up 16 percent. At the other end, despite a recent rally, the Hang Seng index in Hong Kong is down 2 percent for the year. Meanwhile, the AI thematic has helped Taiwan into second place regionally, with a 10 percent gain; but Korea has risen by a lot less.

Our highest conviction views remains that we\\u2019re in the midst of multi-year secular bull markets in Japan and India, whilst at the same time China is in a secular bear market. So, let\\u2019s lay out the building blocks of those theses.

Firstly, Japan\\u2019s Return on Equity Journey. We think that markets \\u2013 like stocks \\u2013 reward improvement in profitability or ROE. The drivers of the ROE improvement are numerous but include domestic reflation, a weaker Yen, a productive capex cycle and improved capital management by Japan\\u2019s leading firms. And these together have led to improving net income margins in two-thirds of industries versus a decade ago. 

We forecast robust EPS growth of around 9 percent in 2024, with similar growth in 2025. Now that\\u2019s assuming our foreign exchange strategists\\u2019 USD/JPY forecast of 140 for the fourth quarter of this year is accurate. This week the BOJ \\u2013 the Bank of Japan \\u2013 is considering whether to exit its Negative Interest Rate Policy and abolish or flex yield curve control. If it does so, that will be a sign \\u2013 along with recent strong wage gains \\u2013 that Japan has definitively exited deflation.

Secondly, India\\u2019s Decade. Multipolar world trends are supporting foreign direct investment (FDI) flows and portfolio flows to India, whilst positive demographics from a rapidly growing working age population are also supporting the equity market. India is holding national elections in May, and we will be watching the policy framework thereafter. But our base case is little change; success that India has achieved in macro-stability is underpinning a strong capex and profits outlook.

Finally, China\\u2019s Deflationary Challenge. China continues to battle what we\\u2019ve termed its 3D challenge of Debt (now standing at 300 per cent of GDP), Demographics and Deflation. And profitability has fallen steadily in recent years \\u2013 so going in the opposite direction from Japan; approximately halving since the middle of the last decade, whilst earnings have missed for nine straight quarters. We think more forceful countercyclical measures are needed to boost demand in China given incipient balance sheet recession due to headwinds from property and local government austerity.

Finally, to summarize some of our sector and style views. We still like Korea and Taiwan\\u2019s semiconductors, into an expected 2024 recovery in traditional product areas such as smart phone, as well as the new theme of AI related demand. We are positive on Financials in India, Indonesia and Singapore; Industrials in India and Mexico; and Consumer Discretionary in India. On the quant and style side, we\\u2019re neutral on value versus growth as we expect the path to lower yields to be bumpy \\u2013 as inflation risk remains. And we have recently recommended investors to reduce momentum exposure for risk management purposes given the strong outperformance year to date.

Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen \\u2013 and leave us a review. We\\u2019d love to hear from you.