Asian stock markets posted modest gains in a volatile first half of 2023, as China’s reopening, AI optimism, a tourism recovery, and moderating raw materials prices offset concerns over inflation, higher-for-longer interest rates, a weak Chinese economic recovery, and global recession risks.
In China, the economic recovery hasn’t gained momentum, so it’s likely there’ll be economic support from the government. That’ll be important in rebuilding consumer confidence, which is the first building block of a sustained domestic recovery. At this stage, Chinese stock market valuations look attractive on an absolute and relative basis.
Outside of China, the rest of Asia is benefiting from global supply chain diversification owing to geopolitical risk, while India is in the early stages of a cyclical economic upswing and enjoying demographics that position the country well for sustainable long-term growth.
The AI wave will have global implications, including for Chinese internet firms and for other parts of the technology supply chain across Asia, namely semiconductor and consumer electronics companies. Nvidia’s latest update showed booming demand for its chips, which process data and power generative AI for big computers.
Asian stock markets posted modest gains in a volatile first half of 2023, as China’s reopening, AI optimism, a tourism recovery, and moderating raw materials prices offset concerns over inflation, higher-for-longer interest rates, a weak Chinese economic recovery, and global recession risks.
In China, the economic recovery hasn’t gained momentum, so it’s likely there’ll be economic support from the government. That’ll be important in rebuilding consumer confidence, which is the first building block of a sustained domestic recovery. At this stage, Chinese stock market valuations look attractive on an absolute and relative basis.
Outside of China, the rest of Asia is benefiting from global supply chain diversification owing to geopolitical risk, while India is in the early stages of a cyclical economic upswing and enjoying demographics that position the country well for sustainable long-term growth.
The AI wave will have global implications, including for Chinese internet firms and for other parts of the technology supply chain across Asia, namely semiconductor and consumer electronics companies. Nvidia’s latest update showed booming demand for its chips, which process data and power generative AI for big computers.
The S&P 500 shot up like a rocket ship in the volatile first six months of 2023, rising 16%, but across Asian stock markets, the gains stayed a lot closer to Earth, with the benchmark MSCI Asia Pacific ex-Japan Index rising just 3%. So let’s take a look back at the region’s stocks – and a look forward at what’s likely to happen next.
In the first half of the year, investor concerns reemerged over the strength of China’s economic recovery. Those concerns were seemingly justified given softening macro data, and were reflected in weakness in mainland Chinese stocks and in the currency, the yuan.
There’s still significant pent-up demand in China, but so far, this has only fed through to a recovery in services spending. Over time, spending should pick up more, thanks to all the excess household savings that built up during the pandemic. And as reopening benefits fully materialize across the country, there could be a domino effect across many industries, including tourism, travel, healthcare, property, and banking.
The challenge is that it’s difficult to have confidence about when consumer sentiment in China might recover and when the huge pent-up savings might convert into a renewed demand cycle. And as a result, the Chinese stock market appears to have become mostly driven by investor mood, given a lack of direction in both the economic recovery and support from the government.
The future’s likely most promising for firms that are able to adapt to changing regulatory frameworks in areas like digital innovation, green technology, and access to affordable healthcare. But China’s also a huge consumer market with a growing and increasingly affluent middle class, making it attractive to a range of firms over the long term.
The Indian economy is in the early stages of a cyclical upswing. It’s one of the fastest-growing countries in the world, thanks to a resilient domestic environment and supportive government policy.
In recent months, the country’s inflation rate has dropped into the central bank’s target range, allowing the Reserve Bank of India to hit pause on interest rate increases. Retail sales growth, meanwhile, has been on an upward trajectory. And with inflation easing, investors are expecting a more robust pick-up in demand in the second half of the year – helping sustain attractive earnings growth and a recovery in return on equity.
On the other hand, India faces some near-term risks. For one, the economy’s exposed to any potential slowdown in global growth. And for another, monsoon season could push food prices and overall inflation higher, whilst also dampening a recovery in rural consumption. Finally, the outcome of the 2024 parliamentary elections also remains a key risk, as political continuity is important for the Indian market.
Analyst forecasts for this year’s earnings for the benchmark MSCI AC Asia Pacific ex-Japan index have been cut by 9% this year. However, investors appear to expect improving earnings momentum in the fourth quarter and through the early part of next year.
Recoveries across Asia continue to gain momentum post Covid, while China – which has the potential to spring back to economic life – could have spillover effects benefitting the rest of the region.
The benchmark MSCI AC Asia Pacific ex-Japan index is trading at relatively attractive valuations, with a 12-month forward price-to-earnings (P/E) ratio of 13.2x and a price-to-book (P/B) of 1.6x. Asian stocks overall are still trading at a big valuation discount compared to US stocks, but are in line with their European counterparts.
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Learn MoreDisclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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