To The Moon

China's growth has finally bottomed out, and a rare increase in the deficit this year suggests better prospects for growth in the near term. In 2024, we expect GDP growth of 4.5%, a balance between economic growth and deleveraging, while waiting for more policy signals. While more infrastructure stimulus should mitigate downside risks, sharp structural problems such as underconsumption and debt deleveraging will still take time and more difficult policy decisions to address.

Therefore, we do not think that China's foreign exchange and interest rates will shine. If the strong dollar trend continues, the need to restructure debt while keeping domestic interest rates low will continue to limit the exchange rate of RMB. We expect only a mild bull steep rebound in RMB interest rates. With the issuance of 1 trillion yuan of government bonds, the central bank is likely to increase liquidity to the system more proactively by cutting reserve requirements.

Although the forward price-to-earnings ratio is historically low, we don't think now is the time to invest in Chinese equities. Conditions for a sustainable turnaround include (i) a reacceleration in growth, (ii) additional demand for shares (share buybacks? Stabilization fund? Insurers raise equity allocation?) and (iii) the rapprochement of US / China relations. None of these is likely to happen in the foreseeable future. Once the market stabilizes, we expect green transition stocks to return to outperformance.

Asian regional analysis

Exports are bottoming out amid more signs of stabilizing demand for semiconductors and electronics. In a significant number of economies, higher energy prices have led headline inflation to accelerate again, while core inflation remains elevated. The Reserve Bank of Australia is expected to raise interest rates again. The BOJ has made YCC more flexible, but we think there is still some distance to definitively abolishing YCC and ending negative interest rates. Volatile capital flows are keeping emerging market central banks in Asia on their toes, but we do not expect to force rate hikes as central banks Indonesia and the Philippines have done.

Asian Forex should take a breather given the dovish outcome of the US Federal Open Market Committee (FOMC) in November, but it is too early to predict a sustained recovery. Looking at the impact of external factors on Asian FX, we maintain our current moderately bearish view on RMB and the Indonesian rupiah, and are increasingly constructive on the Korean Won, as well as the New Taiwan Dollar and the Indian Rupee. The trajectory of UST yields can go in any direction in the short term, but is likely to continue to dominate the performance of Asian interest rates (with the exception of Chinese rates).

In equities, the profit recovery in emerging markets in Asia has been sluggish, and equity outflows from the stock market have accelerated. The exception is India, whose equity markets have decoupled from the US financial tightening, so we would pick India and South Korea. Among developed markets, Japanese equities are our top picks for profit, policy and governance reforms.