We believe that the rewards will outweigh the risks related to China amid an existence of enough cyclical, thematic and structural trends that could enable the country to outperform in 2023; particular focus will be on the government’s zero-COVID policy and its support for the property sector.
Most Asian countries are expected to grow at a slower pace in 2023 than they did in 2022, and fiscal stimulus will no longer be a dominant factor driving growth in the region. We expect monetary policy outlook to persist as the primary driver of rates in 2023 with focus on the potential end to the tightening cycle.
We present our 2023 outlook for core markets, emerging markets and global credit.
As we look towards 2023, it is easy to be overwhelmed by the broader permutations of possible outcomes. But things don’t appear so dire in Asia. Inflation, which is effectively a value transfer from net consumers to net producers, may continue to benefit India and pockets of ASEAN due to favourable demographics and rising productivity.
We believe that the benign macro backdrop should remain supportive for credit fundamentals in 2023. The fiscal deficits of Asian economies are expected to gradually narrow as the need for pandemic support decreases.
As geopolitical risks and globalisation are reassessed in the wake of the COVID-19 pandemic and war in Europe, we believe that Japan stands to benefit as more companies refocus on their home markets.
Asian stocks rebounded strongly in November after Federal Reserve Fed Chair Jerome Powell pointed to slower pace of monetary policy tightening and lifted market sentiment. All Asian markets ended in positive territory, with China in the lead with a month-on-month (MoM) gain of 29.7%.
While we do not expect the US Federal Reserve to pivot any time soon towards easing policy, the firm break in dollar momentum perhaps reflects a shift in the relative growth story which had favoured the US towards one focused on the rest of the world centred around improving China demand.
We don’t expect smooth sailing for the global economy and markets, but there should be great relief for both stocks and bonds in 2023, with pockets of strong outperformance due to idiosyncratic advantages. Notably, Europe and Developed Pacific-ex Japan should be overweighed for equites for the next six months, but Japan should perform the best by next December.