Looking forward towards the end of this year, our base case is that major Western economies should underperform as shown by their declining PMI numbers and slowing growth in corporate earnings. The risk of recession remains high in this region, in our view. We believe that the current rally in AI-related stocks is largely due to sentiment rather than fundamentals as most AI services are still at an introductory stage without a sustainable business model. Having said that, we always had conviction in the long-term adoption of AI technology.
Over in China, depressed consumer sentiment continues to be a challenge for the country despite the gradual improvement seen in the economy. Quantifiable factors still point to the weak property market and high unemployment rate for young adults. There has been news from state newspapers that officials will roll-out policies to support the real estate market and may also consider introducing measures to boost business confidence. Additionally, the recent shake-up at the People’s Bank of China where a new central bank chief was appointed, signals that the government should soon take action to support their currency and economy, in our view.
In other parts of Asia, Japan is staging a broad economic recovery since reopening its economy as foreign demand returns to the country. We also see certain ASEAN countries, such as Vietnam, to be a beneficiary of the “de-risking” trend from manufacturing hubs in China. These countries will also be under our watchlist going forward.
We maintain the view that Asian economies and corporate earnings will continue improving considerably from 2022 levels. Valuations in Asian markets are also fair-to-cheap relative to their long-term average. On the other hand, US equity markets will likely continue to post slowing growth, despite their fair-to-expensive valuation compared to their long-term average. In Europe, we are deeply concerned of the long-term effects caused by the Ukraine-Russia conflict and will be extremely selective if investing in this region.