Asia warming up for longer market rally in 2023

During the final few weeks in 2022, global risky assets enjoyed a window of better performance on the view that conditions were oversold, and that interest rate volatility was subsiding as we moved closer to the peak in rates in the US.

Although the likelihood for a challenging global outlook remains high in 2023, we are seeing more opportunities within the Asia Pacific region. The positive moves by the Chinese policy makers, Asian markets gearing ahead of developed markets to end the tightening cycle, as well as attractive valuations relative to history and global peers are among the positive catalysts for Asian assets to perform well.

Indeed, we are seeing a brighter path ahead, but the financial markets shouldn’t get overly excited and forget about the risks. We believe investors taking a more diversified approach alongside risk management considerations will be better equipped to weather through a bumpy recovery.

Asia equities set to outrun peers

Currently, the market is expecting the Fed funds rate to peak at around 5%. Such expectations seem fair, but the interest rate cuts priced into the second half of 2023 could be implying that a recession is not adequately reflected in corporate earnings expectations.

Even though global equities have rallied off their lows, particularly in the developed markets, we are concerned that valuations in some areas are not cheap enough. That being said, we are starting to see more differentiation within equities.

From a valuation perspective, regions including emerging markets, Asia, and China are becoming more attractive. In particular, Asian equities are expected to see support from oversold levels, improvement in market sentiment, and the prospect for China to stage an economic recovery in 2023 over the medium term.

With an improved macro backdrop that comes with changes in policy, certain areas in the China market are starting to look interesting. We continue to favour a subset of the market that offers attractive risk reward following the easing of Covid restrictions and companies that are closely aligned with the government’s strategic priorities. The expected recovery in consumption and economic activities should also give legs to selective Chinese e-commerce and online entertainment platforms.

Elsewhere in Asia, we think the defensive profile of Australia, long-term economic growth in India, and global industry leaders in Korea and Taiwan will have a key role to play in 2023. We also see opportunities within the financial sector across the region which can benefit from higher interest rates, and consequently offer attractive valuations and yields.

Gradual recovery in Asian credit as headwinds turn into tailwinds

On the fixed income front, Asian bonds have faced headwinds over the last two years, but concerns caused by hawkish central banks, China’s Covid situation, and housing market concerns in mainland China are gradually becoming tailwinds now.

We are expecting a gradual recovery in the Asian credit universe, especially in investment grade bonds where segments with stable fundamentals should be supported by attractive valuations. Meanwhile, volatility may continue to linger in the Asian high yield segment.

While the recent relaxation of Covid rules and a coordinated set of property support measures can help reduce systematic risks, a sustained property market recovery will still depend on the execution of policy and future supportive measures. Until a solid pick up in housing sales is observed, it may be better for investors to focus on the strongest players within the China property sector to start.

Opportunities exist but don’t forget about the risks

With global macroeconomic challenges looming ahead, particularly the extent of further rate hikes and whether developed economies will experience hard landings, their impact will likely span across various investment markets with little exception.

For Asian equities, the road of recovery is expected to be bumpy, and selectivity remains crucial.

Similarly, attractive yields and improved market sentiment should support Asian fixed income assets in 2023. However, volatility is likely going to persist in the near-term and investors shall tread with caution, whilst taking heed of bottom-up opportunities.

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