China’s reopening from covid-related restrictions bodes well for the region’s prospects
As the baton passes from 2022’s year of the Tiger (adventurous but unpredictable) to 2023’s year of the Rabbit (peaceful and prosperous) let’s hope that the next 11 months live up to their Chinese animal character traits.
Certainly, most of China’s neighbours, if not the globe, are willing the country on towards the promise of prosperity, such is the dependence of the global economy on this Asian super engine. Fortunately, their hopes have foundations in reality and after the years of Covid drag, this year should see China’s influence on the investment markets rotate from a headwind to tailwind.
China’s delayed post-Covid reopening puts it in a different stage of the growth cycle to other countries as pent-up demand from lockdowns is still waiting to be fulfilled. We expect this should boost growth to around 5.5% this year, which would make China one of only a handful of countries expanding in 2023. Given the trade linkages China has to other economies in the region, this should be a significant driver of growth for the whole of Asia.
Pragmatic policies, by the Chinese authorities, have already produced some successes, for example stabilising the country’s property sector. The easing of travel restrictions was also delivered just in time for the all-important New Year holidays, supporting a recovery in consumer demand. This augurs well and we believe the outlook for Asia is better than it has been for some years.
Among other (ex-China) supporting factors, the US dollar is weakening, corporate balance sheets are generally in good shape (many companies in the region have been buying back stock) and unlike in the West, inflation does not appear to be a problem, so authorities are not broadly raising rates to tackle it.
Valuations still appear attractive, both in absolute and relative terms (just below the 10-year average) and although the equity valuations in Asia are much lower than in the US, credit valuations are very similar. This suggests that credit investors in Asia are not as pessimistic as equity investors. We are with the optimists.
Alongside our optimism, we are realistic. Investment in the region does not come without challenges. The most obvious perhaps relate to geopolitical issues such as China v US, Hong Kong and Taiwan. Another, the relative recency of reopening in many countries in the region means that alongside the pick-up in mobility we could also see an increase in infections, prompting a stop/start of activity for a time.
We are prepared for this. The long-term demographics (Indonesia and the Philippines particularly), diverse foundations of economies in the region and a favourable assessment of the available risk/reward profile of assets, means that Asia is the only equity region where we are comfortable holding an overweight position.
