China’s decision to move away from its zero-COVID policies and pivot toward prioritizing growth should prove a significant catalyst for emerging Asian equity markets. A peak in US inflation may lead the US Federal Reserve to adjust its pace of rate increases, which is turning the US dollar from a headwind to tailwind. These shifts have positive implications for liquidity, and in turn, for emerging Asian equities.
We believe market performance in 2023 is likely to be better than 2022 as negative news on known factors (inflation, war, China) may only have a limited downside impact on markets, whereas positive news could be the catalyst for a valuation re-rating and market gains. Key drivers of our optimism include:
- The performance of emerging Asian equities relative to emerging markets (EM) overall has been linked with the trend in Asian and world relative economic growth trends. With the economic growth differential forecast1 to move in favor of Asia in 2023, equity market performance trends should also favor the relative performance of emerging Asia over developed market (DM) equities.
- China’s pivot away from its zero-COVID policies and the dismantling of many of the restrictions on the freedom of movement is a significant change. Economic and earnings growth in China slowed significantly in 2022 due to sudden lockdowns, the crackdown in platform companies and the tightening of liquidity in the real estate sector. With the focus now pivoting to revitalizing growth, policies to support these sectors are being rolled out, which we expect should drive a recovery in earnings growth forecasts and improved market performance.
Pivoting from zero-COVID policy
With China pivoting away from its zero-COVID policy, Southeast Asia should prove a key beneficiary of a resumption in Chinese outbound tourism. Prior to COVID-19, China accounted for 25% of tourist arrivals in Thailand,2 but fell to almost zero in 2021 and less than 1% in 2022. Vietnam and Cambodia will also likely benefit from the resumption in Chinese tourism.
Inflationary pressures in Asia have been more muted relative to developed markets, as well as other EM regions, including the Middle East, Eastern Europe and Latin America. This reflects cheaper energy imports from Russia as well as adequate harvests, which has kept food price inflation in check and subdued wage inflation.
The higher share of domestic demand in gross domestic product drives the uncorrelated nature of returns in selected Asian markets, including India and Indonesia, relative to developed markets. At a time of slowing global growth, investors with lower risk appetite can potentially benefit from increased allocation to these markets. The meeting at the G20 summit in Bali in November between China’s President Xi Jinping and US President Joe Biden put a floor on US/China relations. Future relations are likely to be governed by the 3C framework: communication and coordination with competition.
Improved communication and coordination should be positive for investors and reduce the tail risk in asset markets. While competition creates uncertainty over future trade and investment policies, Asian companies have been diversifying their production bases as a way to reduce the impact of increased competition between the two countries.
We believe that combining these drivers with the valuation discount of Asian equities relative to DMs, as well as their own historic valuations,3 creates a powerful argument for strong performance in emerging Asian equities in 2023.
Asia is home to leading companies of the future, ranging from solar to electric vehicle batteries to semiconductors. Structural drivers include digitalization and decarbonization, which are creating opportunities and inspiring Asian companies to be best-in-class producers. Added to that are Chinese platform and Indian business process outsourcing companies which have led the world in creating new market segments and exporting these business models to Asia and beyond.
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1. Source: IMF World Economic Outlook. October 2022. There is no assurance that any estimate, forecast or projection will be realized.
2. Source: Bloomberg
3. Asian equities (as represented by the MSCI Asia ex-Japan Index) are trading at 45% discount to developed markets (represented by the MSCI World Index) on a price-to-book basis, compared to the 15-year average of 20%. On an absolute basis they are trading at 1.5x price-to-book compared to the 15-year average of 1.75x. Source: Bloomberg. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future results.
