Global Courant
The Japanese flag flies over the headquarters of the Bank of Japan (BoJ) (below) in Tokyo on April 27, 2022.
Kazuhiro Nogi | Afp | Getty Images
As the world grapples with renewed fears of a global recession, analysts say Asia stands out as the region to watch and could outperform the broader global market.
On the face of it, Asian equities as a whole have made more modest gains so far this year compared to their US and European counterparts. The MSCI International All Country Asia Pacific index is up just 4.71% against the broad index so far S&P 500 and pan-Europe EuroStoxx 600which rose by 13.25% and 6.65% respectively.
But Asia is more economically diverse than Europe and the US, and there are still bright spots in the region, especially in Japan and South Korea.
Earlier this month, Nomura said Asia is likely to outperform over the medium term as “the prospect of subdued global growth and the imminent end of policy rate hikes are likely to spur investors to seek new opportunities while placing a premium on healthy economic growth .” fundamentals.”
It added that Asian economies have “largely” avoided large-scale qualitative easing, leaving the region better off in terms of fiscal sustainability, inflation challenges and the health of the financial system.
While the Nomura analysts expect the Chinese economy to slow, they expect GDP growth in Asia to “sustainably” outperform other emerging markets and the US, with India and Southeast Asia set to be the fastest growing economies this decade.
This view is also shared by analyst Daniela Gombert of asset manager DWS, who said that “on a 12-month horizon, the Asian and European equity markets look much more promising than the US market.”
Solid foundations in Japan
Specifically for Asia, Gombert points to the Japanese stock market, saying, “Unlike about 30 years ago, valuations are nowhere near as exaggerated as they used to be. In general, Japanese stocks allow investors to be a part of the Asian growth story.” “
While most of Asia recovered from the pandemic, Japanese markets led gains, with the Nikkei 225 up nearly 25% year-to-date and the broad-based Topix up around 21.5%.
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The company said China’s reopening and the return of tourists should bode well for Japan. Therefore, Gombert believes that “Japan should be quite an interesting market for investors, even if prices have already had a good run in the near term.”
The Bank of Japan will also be under close scrutiny after Governor Kazuo Ueda took over earlier this year. Ueda is widely expected to pull the BOJ out of his ultra-accommodating monetary policy, although he has not made any changes to the BOJ’s policy so far.
Private banking firm Lombard Odier noted that headline inflation has recovered in Japan and wage negotiations in the spring have produced one of the highest base salaries in decades.
The company also expects “another year of inflation above target in 2023” and predicted that the BOJ will respond later in the year by ending its “yield curve control” policy.
During the central bank June meetingone policymaker said a “revision of the treatment of yield curve control should be discussed at an early stage,” marking the first time a BOJ summary of opinions explicitly stated the need for a “revision” of YCC policies.
In April, the BOJ announced it will conduct a “broad perspective review of (its) monetary policy,” which could take 12 to 18 months. But Lombard Odier still expects the BOJ to end yield curve control policies before this review is over.
End of rate hikes in Asia
While the US Federal Reserve has indicated that it may raise interest rates by another 50 basis points before the end of the year, Morgan Stanley forecast that inflation has peaked in most economies in Asia, noting that nearly all central banks in the region have paused their rate hike cycles.
“We think this pause is sustainable and, in fact, further disinflation opens up room for rate cuts as central banks do not need to raise real interest rates into restrictive territory,” the team of four economists wrote in a note earlier this month.
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Morgan Stanley said the disinflation process in Asia is “in full swing” and expects inflation to return to target ranges for 80% of the region in the next three months.
As such, it expects Asian central banks to be able to cut rates even ahead of the Fed, with early movers such as Indonesia set to act as early as the fourth quarter of 2023.
AI an important driver
Technological developments are another reason for optimism in Asia. With the advent of generative artificial intelligence such as OpenAI’s ChatGPT, from Google Bard and Baidus Ernie Bot, attention has also turned to the hardware powering these AI tools, namely semiconductors.
Countries have poured huge subsidies into building chip factories and boosting semiconductor production, such as the US Chips Act, which will provide $280 billion in subsidies over the next decade.
Lombard Odier senior equity research analyst for tech Marco Barresi stressed that Japan, South Korea and Taiwan also provide tax credits and subsidies.
In addition, Barresi said that despite U.S. restrictions on China obtaining advanced chip technology, China is working to support its semiconductor industry, which could amount to an estimated $143 billion in subsidies over five years.
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Barresi added that AI will create a new generation of tech startups and applications, just as “the advent of the iPhone has built an entire industry around mobile applications and the rise of cloud computing has created a new sector of software companies.”
He also points out that nearly a third of global semiconductor revenues in 2022 were in the most advanced computer chips – and that Asian companies account for most of the production of these advanced chips.
Two Asian companies dominate the production of these advanced chips viz Taiwan Semiconductor Manufacturing Co and Samsung Electronics of South Korea.
Barresi writes, “We favor semiconductor manufacturers that serve the cloud market and are thus exposed to developments in AI or electrification. This aligns well with our overall preference for high-end technology companies as the economic cycle evolves.”
