To The Moon

Global equities continue to face headwinds amid slowing growth. But strong domestic demand could help Asian markets to buck the trend

By Tony Raza, Head of Multi-Asset Strategy, UOB Asset Management

2022 was a challenging year for investors, with rampant inflation and rising interest rates weighing on all asset classes. Global stocks sank into a bear market, bonds had one of their worst years in decades, gold and crypto declined, and most currencies weakened against the US dollar. Nevertheless, we think the uncertainties that clouded 2022 are clearing up as global inflationary pressures start to subside.

2023 key takeaways

• Economic growth is likely to slow, but a recession is not our base case unless the US sees a significant jump in unemployment
• Recession fears are likely to weigh on equity markets in the near term, but the downside should be limited as recession risks have been mostly priced in
• Inflation should moderate and growth should pick up again by the second half of 2023
• Solid company earnings and better valuations should improve long-term equity returns
• In the short term, we recommend investors focus on bonds and hold stocks based on a neutral weighting
• Asia economies and markets appear more resilient than other regions and should benefit from China’s reopening

Asian equities show resilience

Within equities, we think Asia is poised to perform better than most regions, notwithstanding slowing global growth.

A key factor is Asia’s domestic demand resilience. We expect growth in domestic demand to be supported by reopening activities, especially from China. For ASEAN economies, the on-going reopening impulse should also deliver a greater uplift in the services sector.

Moreover, Asia has structurally higher growth that can operate better in an environment of rising interest rates. As such, we think Asia’s economies can hold up against the expected level of interest rate hikes.

In particular, we have turned slightly more constructive on North Asia amid clear signs of China’s reopening and pro-growth policy support, and expectations of a tech rebound in Taiwan. We are also overweight Singapore and Indonesia.

Eyes on China’s reopening

Hammered by harsh lockdowns and a property market crisis, China’s economy is expected to expand just 3.3 per cent[1] this year, which would mark one of its weakest growth levels in decades.

To get back on track, China has recently relaxed its zero-COVID restrictions and pledged to adopt pro-growth policies.

Notably, the following were outlined at the annual Central Economic Work Conference (CEWC)[2]:

• Expand domestic consumption by supporting new types of consumption including housing improvement, new energy vehicles and elderly care
• Further support the beleaguered property market with measures on top of China’s earlier 16-point rescue package
• Promote China’s digital economy by providing support to internet platform companies to help drive economic growth and create jobs
• Pursue pro-growth, but also pragmatic and measured fiscal and monetary policies

These catalysts bode well for China’s economy in 2023. While the road to recovery could be bumpy in the near term as China faces a surge of COVID-19 cases, we expect a full reopening to take place at the end of 1Q 2023.

Our view is that China’s risk/reward profile is turning more attractive, and we have upgraded our position on China to overweight.

Taiwan’s tech rebound

For Taiwan, we expect the tech sector to rebound in the short term given that tech stocks, especiallysemiconductor names, have been oversold recently. Moreover,Taiwan’s relative valuation is compelling while the growth drag from the semiconductor/hardware downcycle appears largely discounted by the market.

Indonesia to retain good growth

Within ASEAN, we turn positive on Indonesia. We expect private consumption to remain resilient amid relatively strong GDP growth. Indonesia’s central bank forecasts the country’s economy to grow by 4.5 to 5.3 per cent[3] in 2023.

Singapore companies maintain good earnings

We also retain our overweight call on Singapore stocks based on their relative earnings resilience. This is underpinned by a solid outlook across Singapore’s financials, property, and transport sectors.

At the same time, the rebound in the meetings, incentives, conferences & exhibitions (MICE) industry and the continued reopening impulse across ASEAN should benefit Singapore’s services sector. We think this recovery will likely offset the weakness in exports and external demand.

Watch out for risks

Overall, we think equity valuations in Asia are at historically attractive levels and China’s pro-growth policy shift could be an economic gamechanger.

However, risks to our outlook include a slower-than-expected reopening in China, persistently high global inflation, and worsening geopolitical tensions between China and the US. A drastic global growth slowdown would also dilute the positive effects of local domestic demand.

[1] OECD, “Economic outlook note”, November 2022

[2] Central Economic Work Conference official readout, December 2022

[3] Bank Indonesia, “Bank Indonesia projects 4.5-5.3% economic growth and inflation to return to the 3.0% ±1% target range in 2023”, December 2022

About UOB Asset Management

UOB Asset Management (UOBAM) is a leading Asia-based asset manager headquartered in Singapore. Since our establishment in 1986, we have grown extensively across Asia with a presence in 9 markets.

Through our regional network, we offer global investment management expertise to individuals, institutions, and corporations. Our comprehensive suite of products ranges from retail unit trusts and exchange-traded funds to customised portfolio management services for institutional clients.

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