With recessionary conditions likely to emerge across much of the developed world in 2023, this looks to be a decent outcome for Asia in the near to medium term as investors seek for higher returns as its equity premium appears to be relatively more attractive.
The US and European economies would continue to weaken at least to the first half of 2023 given the recent economic readings we have seen. At the same time, these economies are still muddling through a tightening monetary policy regime with high inflation still to be effectively tamed. We are unsure how the economic damage would be like after this tightening phase.
The outcome of the US midterm elections is now conclusive, following the Republicans taking control of the House of Representatives, albeit by a smaller-than-expected margin. This could result in some headwinds to fiscal spending.
On the other hand, we are optimistic on the Asian markets and economies as we believe a market bottom has been formed. China’s October activity data indicated slowing economic growth and greater slack in the job market. However, these are backward-looking, and financial markets are likely to look through the soft near-term data given recent positive policy signals on zero-COVID and the property sector.
Despite near-term challenges, our base case is that China will exit its dynamic zero-COVID regime next year, as authorities lay the groundwork on areas like vaccination. We have seen follow-up measures after local media reporting of 16 measures from regulators which aims to solve property market issues. These measures include the People’s Bank of China (“PBOC”) and the China Banking and Insurance Regulatory Commission asking commercial banks to loosen presales escrow account for developers, which can withdraw more cash from the accounts if they meet some criteria. We expect to see more follow up measures in the near future. The PBOC has also announced a reserve requirement ratio cut, a policy signal that monetary policy will remain supportive to stabilise growth.
On the geopolitical front, the US-China relations should remain contentious. While a full economic decoupling is not realistic, the US will be pursuing industrial policies that would curb exports to China on areas like artificial intelligence, quantum computing and biotech.
The investment environment in 2023 for the developed markets is likely to remain highly uncertain given the lagged impact of rate hikes, sticky inflation and unfavourable earnings outlook. We believe the worst for developed markets in terms of growth and earnings are ahead, and risk asset valuations currently have not deteriorated sufficiently to reflect this.
Market inflection points historically take place before the end of recessions. Looking ahead, we expect risk assets in the developed markets to bottom out and stage a broad recovery as we make our way past peak Fed hawkishness and inflation decelerates more markedly in later part of 2023.
We adopt more positive views on the Asian markets, especially Chinese securities. We are hopeful that the Asian equities should stage a meaningful recovery from now on since its recent bottom in October.