Since the world’s biggest chip maker reported impressive Q2 results but provided relatively conservative guidance for Q3, investors have been doubting whether the Artificial Intelligence (AI) frenzy could last. In addition, slowing labor market momentum in the US signals a slowdown in the global economy. As a result, we witnessed a rotation from growth to value stocks over the last two weeks. The Bloomberg World Semiconductor Index has gone down by 14.2% (as of September 9, 2024) from historical high in July. However, for investors who believe in the long-term structural growth of the industry, Asia can potentially offer a diversified source of growth.

While the majority of fabless design technology is held by US technology giants, Asia plays a critical role in the global semiconductor supply chain. The semiconductor memory industry is an oligopolistic market led by South Korean companies. Their technological advantages in developing DDR5 dynamic random access memory (DRAM) and high-bandwidth memory (HBM) for high-performance computing are unparalleled globally. The same is true for the foundry industry in Taiwan. Specialization as pure-play foundries allows Taiwanese companies to focus on investing in cutting-edge manufacturing processes and technology nodes to sustain their competitive advantage. The competitiveness of Korean memory makers and Taiwanese foundries is evident in their leading and rising global market share. A change in the competitive landscape is highly unlikely.

^{Source: National Bureau of Statistics of China, as of July 30, 2024}

Speculation, particularly in the property market, is also clearly in the crosshairs. China’s consistent reluctance to bail out unsold property inventory and India’s move to remove inflation indexation benefits for capital gain tax send a clear message – the days of unbridled real estate speculation may also come to an end in India.

Besides reining in excessive spending and optimizing tax revenue, manufacturing growth is a key priority for both India and China as they have logically thought out their self-reliance strategies. In India, they have lowered import duties for equipment used in solar and specific telecom equipment manufacturing and introduced a credit guarantee scheme targeted at small and medium-sized Enterprises (SMEs). In China, the reform resolution pledged to keep the share of manufacturing stable and lower its cost and tax burden, while promoting high-tech sectors such as new-generation IT, AI, new energy, and new materials.

While there are similarities, there are also differences. China has put more emphasis on the role of local governments and state-owned enterprises (SOEs) in the third plenum. For SOEs, the resolution highlights their role in key sectors related to national security, public welfare, and strategic emerging sectors. Further SOE reforms could happen in energy, rail, telecom, water conservancy, and utility.

The labor market is also in focus in both countries, with an aim to grow the labor force. China has proposed plans to defer retirement. In India, they focus on creating jobs, which was one of the lessons learned from the recent defeat of the Modi government. A series of programs, including handouts to employees, incentives for companies hiring new workers, and skills development programs, have all been proposed in the budget.

Against the backdrop of deglobalization, China and India seem to have taken different approaches. China is laser-focused on strengthening domestic economic capabilities and supply chain resilience. In contrast, by reducing and exempting tariffs on a wider range of goods, India is on a journey to further integrate itself into the global economy. Of course, both countries remain protective of critical local industries.

To be sure, this more austere approach is likely to disappoint those hoping for substantial government incentives. The lack of substantial consumption-boosting measures in these recent policy announcements would sting for many market participants. However, one could argue that by curbing speculative excesses, China could better navigate the time of fiscal stress as economy slows while India could be laying the groundwork for more sustainable, stable economic growth – even if it comes at the expense of some immediate gratification.

Ultimately, the pivotal issue will be whether these policy shifts can strike the right balance between fiscal responsibilities and supporting the livelihoods of their citizens. Only time will tell if this approach pays off for the citizens of these economic powerhouses. Yet at least for the time being, the government bonds in both countries should provide an attractive risk/return trade off under the prudent fiscal policies.