The outlook for 2023 continues to favour Asia when compared to developed countries. The International Monetary Fund has forecasted China’s gross domestic product (“GDP”) to grow by 4.4% year-on-year versus the US’ forecasted growth of 1.0% year-on-year. This would be a significant improvement for China as their GDP growth for 2022 was only 3.0% year-on-year.
The most prominent event for December was when China decided to remove most preventive measures for international travel, after three years of Covid restrictions. We view this as a positive for the Asia region as the reopening came much sooner than most analysts expected. Although there are short-term labour issues due to a spike in Covid cases, we believe the faster reopening will result in quicker earnings recoveries across most sectors in China.
China’s leadership has also publicly announced their determination to support the economy for 2023. Key issues to highlight include further support to the property sector, easing regulatory environment for the technology sector and increased transparency for listed state-owned enterprises. We remain positive on China on the back of these encouraging actions.
Surrounding Asian countries will also benefit from the reopening as consumer and commercial spending improves in the region. We expect to gradually see a shift from goods spending to services, as we saw in developed countries when they first reopened their economies.
With regards to the semiconductor controls against China, Japan and the Netherlands have indicated that they will adopt some US measures to join the export ban on China. We expect the fierce competition for semiconductor leadership between developed countries to continue for the foreseeable future. Despite the massive inflows of investments, this is negative for the semiconductor sector, in our view, as uncertainty in execution and inefficiencies will arise from these countries attempting to build their own supply chain.
In the US and Europe, our outlook remains negative for the first half of 2023 as they are still tightening their monetary policy. Despite inflation cooling slightly in the US, their robust job market could cause inflation to stay elevated. This leads us to believe that higher interest rates and lower economic activity could linger for a while more before a recovery is in sight.
Our thesis between developed markets and Asia is unchanged, we still 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 Asia will enjoy an accelerated recovery from China’s reopening as spending and investment in the region picks-up.