Overall Asian stocks have disappointing performance in 2022 due to dismal returns in Chinese stock markets.
Unfortunately, the near-term outlook for 2023 doesn’t look so good now, with interest rates rising around the world and China clinging to its coronavirus-free policy. Moreover, investors remain nervous about both the direction of the Chinese government’s policies and the ongoing geopolitical tensions between China and the US.
But it’s not all bad news. Valuations in many areas are currently cheap, and sentiment for Asian stocks is already depressed and could rise sharply from current levels over the medium term if the macroeconomic backdrop improves.
The global macro environment is still very difficult. Major Western central banks have been forced to aggressively raise interest rates to slow growth and contain inflationary pressures that have built up over the past 12-18 months. The US could plunge into recession as the Federal Reserve (Fed) continues to raise interest rates at a very aggressive pace and the country’s housing and labor markets slow. Europe is under an even greater strain as rapidly rising energy costs and disruptions from Russia’s invasion of Ukraine further weigh on the cost of living.
After a long period of very low inflation and near-zero interest rates, this sudden regime change poses major challenges for consumers, businesses, governments and investors around the world, and has increased volatility across capital markets.
Asian exports under pressure
The global economic slowdown and low demand for consumer durables are already having a significant impact on Asian exports, especially in the technology sector.
The market has moved rapidly to price in a sharp decline in semiconductor demand over the next few quarters. This has dealt a heavy blow to stock markets in South Korea and Taiwan, which are dominated by export-oriented industries.
As the world’s second largest economy and the largest economy in the Asian region, China’s problems are more domestic. Her ongoing Covid-19 restrictions and the country’s unwavering commitment to a dynamic zero Covid policy are major restraints on domestic demand, affecting nearly every industry, especially consumer-related ones. increase.
Meanwhile, a deliberate crackdown on leverage in the real estate development sector has caused a severe liquidity crisis. Sales then collapsed, and so did new construction activity as buyers postponed apartment purchases and developers hoarded cash. Real estate construction has driven more than 20% of his economic growth in recent years, further depressing economic activity and market returns. Given these challenges, we believe China’s growth prospects are very poor.
US-China geopolitical tensions rise
Also, rising geopolitical tensions between the US and China have increased the risk premium for Asian equities.
The United States recently tightened restrictions on technology exports to China and more clearly identified China as a “strategic competitor.”
Meanwhile, China recently confirmed Xi Jinping as national leader for a third five-year term. His seven-person internal sanctuary that makes the most important decisions, the Politburo Standing Committee (PSC), along with all four incoming members (Li Qiang, Cai Qi, Ding Xuexiang, and Li Xi), is also entirely out of his close allies. formed. His 24-member Political Bureau of the Communist Party, which has significant professional and personal ties to the president, showed much the same trend.
These announcements at 20th The Congress of the Communist Party of China was received cautiously by international investors. Reflecting President Xi’s previously articulated policy objectives, there are concerns that there will be less room for market forces and private sector dynamism, leading to an even more interventionist policy stance in mainland China.
All these tensions run the risk of triggering a more pronounced ‘decoupling’ of the world’s two largest economies going forward, which could have a consequent negative impact on capital flows into Chinese equities. .
China’s zero Covid policy remains a concern
Immediately, there are two key variables that could determine the outlook for Asian equities in 2023. The first concerns China’s response to the Covid-19 outbreak. Given that earnings and valuation multiples could be boosted after the dismal performance seen over the past 18 months, any indication that China is willing to ease its dynamic zero Covid policy could be a huge blow to the market. may be favorably received by
Essentially, we expect policy changes to be phased rather than a one-time easing from Q2 2023 onwards. However, this could be enough to improve sentiment from the current sluggish levels and boost economic growth. It will also help support the Hong Kong SAR market and have a knock-on effect on the growth of other regional economies given its close trade ties.
The second variable is the extent of future rate hikes needed to dampen inflationary pressures in the West, and then the shape of the US and EU economic slowdown (soft or hard landing). A peak interest rate cycle is also likely to lead to a weakening US dollar, which should help liquidity in Asian economies and support equity market valuations. Clearly, the sooner U.S. inflation and interest rate expectations peak, the better the outcome for global stock markets.
Our preferred market sector
Despite the immediate challenges, we continue to favor global industry leaders in key Asian export sectors. This includes South Korean and Taiwanese technology stocks, which have been long-term long-term growth drivers.
The Hong Kong SAR market also offers considerable value and strong business that can weather the current recession. Hong Kong SAR, Singapore and some financial firms in Southeast Asia will also benefit from higher interest rates, offering attractive valuations and yields.
The Indian market also offers some attractive long-term opportunities given its low level of credit penetration and potential for economic ‘catch-up’. However, after a very strong performance over the past couple of years, the current rating has been stretched even further. Australia also offers attractive buying opportunities and a more defensive profile.
We remain alert to China’s political risks and slowing structural growth. As such, we focus on a small subset of the Chinese market that offers attractive risk rewards from the eventual rebound after the easing of Covid-19 restrictions, or companies that are closely aligned with the government’s strategic priorities. is guessing.