Stock strategists predict Asia market rally after terrible 2022

(Bloomberg) — The tide is expected to turn for Asian stocks after two dismal years, with China’s economic reopening and a possible weaker dollar fueling their outperformance in 2023.

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Regional stocks could rise 9% through the end of next year, according to the average of 11 estimates in a survey of strategists compiled by Bloomberg. Most of the negatives that have weighed on Asia — from a supercharged dollar, China’s Covid lockdowns and a chip downcycle — are fading, leading to better earnings prospects.

“The environment in Asian equities is one of many pivotal moments,” said Frank Benzimra, head of Asia equities strategy at Societe Generale SA, adding that he expects earnings to rebound from the second quarter.

The MSCI Asia Pacific excluding Japan index is down 19% so far in 2022, following a 4.9% decline in 2021, widening underperformance against global peers. Foreign investors have pulled more than $50 billion from emerging markets outside of China this year.

While none of the survey participants see Asian stocks falling next year, forecasts varied widely – from flat returns to a 15% jump – underscoring caution about global recession risks and a rocky reopening in China. While regional indicators may beat the S&P 500 index according to strategist surveys, they won’t be able to recoup their own peaks in 2021, even if the most optimistic estimate comes true.

A poll of Asia fund managers by Bank of America this month also found that about 90% of respondents expect Asia ex-Japan equities to rise.

Largest catalysts

China’s rapid lifting of Covid restrictions is expected to fuel the floundering economy – and its regional trading partners – with growth of nearly 5% in 2023. Another driver will be a weaker greenback, with the Bloomberg dollar index falling steadily at against the September record .

Strategists see the market’s initial recovery as a result of low valuations followed by higher earnings expectations. Earnings expectations for the MSCI Asia Pacific ex-Japan Index are up 3.6% since early November, suggesting that the downward revisions may have bottomed out as S&P 500 member budget cuts continue.

“We think Asia can outperform in 2023,” Dan Fineman, co-head of Asia-Pacific equity strategy at Credit Suisse Group AG, wrote in a note this month. “Global investors will move funds from the US to Asia based on resilient revenue, superior margins and profit cycles, a weaker dollar and a positive spin on EPS revisions.”

What is changing

In a trend reversal this year, China will become “investable” again, according to Tina Teng of CMC Markets, with North Asia outperforming its southern counterparts.

South Korea – and to a lesser extent Taiwan – emerge as favorites as they are seen benefiting from an improvement in the tech hardware inventory cycle. Allianz SE, Morgan Stanley and Goldman Sachs Group Inc. also belong to brokers who recommend the markets.

“As growth bottoms out, a more cyclical positioning with Korea and Taiwan would make sense,” said Christian Abuide, head of asset allocation at Lombard Ödier. “Valuations are also attractive.”

The outlook is getting bleaker for markets in the south. India’s relatively higher valuations after a record run may cause it to underperform as Indonesian equities seep ahead this month.

READ: Major rotation is brewing in Asia as investors move north

Biggest risks

An important thing to note is that stock experts tend to be bullish heading into the new year. Forecasts for 2022 were also bullish as a number of Wall Street analysts had touted Chinese stocks to buy, only to be humbled by an epic defeat.

Despite all the optimism, there are plenty of challenges for next year, with concerns over the timing and magnitude of China’s reopening being a major concern.

There will also be plenty of global risk as investors look to possible policy mistakes from the Federal Reserve and continued disruptions to agricultural stocks from the war in Ukraine.

“The black swan in the room is the risk that the Fed is ‘late again,’ but this time by cutting rates,” said Havard Chi, head of research at activist firm Quarz Capital Asia Singapore Pte. Overall, however, he is bullish on Asian equities and predicts the MSCI Asia Pacific Index could rise 10-15% by the end of 2023, driven by rising valuations and earnings.

Goals for 2023

* Figures from Bloomberg survey, research notes close as of Thursday.

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