For signs of economic growth in Asia, look north

Published on23 FEB 2023
Markets Regional Analysis

The reopening of China and an economic recovery in Korea could shift the center of gravity in Asian stock markets to the north, away from India and ASEAN countries, according to a Goldman Sachs Research report.

That shift has already started with north Asia’s strong equity market performance at the start of the year and could gather further momentum towards midyear as rate rises peak, markets begin to anticipate a global growth rebound in 2024, and the US dollar continues to weaken. At the market level, this may manifest in an improvement in regional earnings growth from 4% this year to 16% next. Investors have started to “pre-trade” this anticipated improvement and may consider taking more risk as the macro outlook improves.

According to the report, two big factors are at play: the timing of the US Federal Reserve in easing its rate-hike policy and the reopening of China after relaxing its strict “zero-COVID” policy. GS analysts expect the federal funds rate will peak during the second quarter, marking that as a “potential inflection point for Asian equity markets given the influence that US monetary policy has on Asian equities.” As for China, the strategists note that China’s reopening is better termed “a growth recovery” given the easing of policy across many dimensions, including monetary, fiscal, property and regulation in addition to the shift away from zero-Covid.

The authors also note that while the dollar is likely to strengthen over the next three to six months, they expect it to peak toward the middle of the year and then weaken into the end of it. That would augur well for stocks in Asia-Pacific, they conclude, because historically there has been a strong inverse correlation between the US dollar and regional equity performance.

Where to take more risk is a different question, given the wide differences the GS strategists expect in regional performance. Here’s a quick snapshot of their analysis by market:

  • China: The MSCI China index has rallied 55% since it bottomed on October 31, 2022, but GS researchers write that “the market still has further room to appreciate.” Moreover, they say what they’re seeing in China is more than what’s been described as simply “China reopening.” “The current market rally is not just a consumer and services recovery trade (as it would be if it were only about reopening),” they write, “but a more broad-based growth rebound spanning a wide range of industries.” With that in mind, they’ve raised their earnings-growth projection in China to 17% for 2023, up from an earlier estimate at the end of 2022 of 13%.
  • South Korea: Prospects appear bright into 2024, the report says, noting investors are likely to anticipate the country’s economic rebound this year. To be sure, the near-term outlook for Korean earnings is “poor” due to a weak global growth outlook, the market’s cyclical sensitivity, and high operating leverage in heavyweight sectors such as semiconductors. Those clouds are expected to lift in the latter half of 2023, setting up a potential market improvement of 50% in 2024, supporting the authors’ positive stance. One other possibility our analysts raise: The chance South Korea’s economy is upgraded to developed status, which could significantly drive investment in that market and, subsequently, an uplift in its evaluation.
  • Taiwan: Having been cautious at the end of 2022, due to downturn in tech hardware and geopolitical concerns, our strategists have upgraded their view of Taiwan. “[The] fundamentals appear to be stabilizing or improving, valuations have reset, and geopolitical risk is moderating,” they write. Their analysis goes on to point out that, with considerable exposure to trade with China, Taiwan benefits from that country’s reopening. Furthermore, “the economy and equity market have high exposure to global and US growth, where recession risks appear to be moderating.”
  • India: The nation’s growth story remains strong, with GDP anticipated to moderate from almost 7% in 2022 to a still-solid 5.9% in 2023. But the authors feel India isn’t likely to outperform other markets because its stock valuations remain at a record premium relative to the rest of the region. In addition, near-term cyclical issues such as inflation are seen as persisting, and other markets might outperform based on reopening and recovery expectations.
  • Elsewhere: Hong Kong and Thailand are expected to join China with improving growth momentum – Hong Kong because of its close ties to China’s economy, and Thailand because it’s poised to benefit from both a full year of tourism and lower shipping rates. On the other hand, Australia and Malaysia – both coming off a high base of economic growth – are expected to slow the most. The Philippines will likely decelerate moderately but still post positive growth. Singapore’s economy is likely to slow in 2023 and ramp up in 2024, among the highest in the region. Finally, Indonesia’s growth is expected to slow significantly – from 40% in 2022 to a range of 4% to 8% in 2023 and 2024 as commodity profits decelerate.

On a sector basis, the authors point to opportunities in select value cyclicals – energy and autos – with select exposure to tech and semiconductors as well as some defensive sectors such as telecoms. The authors moderate their outlook for the banking sector given the expected peaking in monetary policy tightening in coming quarters.

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