The Pivot to Asia, Emerging Markets

Asia is set to outgrow and outperform relative to other regions in the coming years. Demographics, supply chain diversification, APAC growth, lower relative valuations, and weaker US Dollar are likely to benefit Asia. The Chief Investment Office is asking investors to consider Emerging Markets, Japan, China, and select ASEAN economies in this pivot to Asia. Asia’s post-COVID reopening came after other regions, but the benefit of its later reopening is faster growth even as the US and Europe are slowing. China is a main driver, even with recent challenges.

Our Expectations:

China Real GDP growth – 5.8% in 2023, 4.5% in 2024.

Asia Ex Japan real GDP growth – 4.0% in 2023, 4.5% in 2024

Views on Asia:

China: China’s recovery has been uneven. Consumer spending, driven by a boom in travel and other service sectors, leads the way. But residential real estate and manufacturing continue to face headwinds, as it will take some time to digest inventories. The government’s pro-growth economic policies have not yet revived market sentiment. We expect additional easing in both business and financial policies, as well as moderate rate cuts in the second half of the year. These actions should spur economic and earnings growth. At current valuations of under 10 times forward earnings, recent disappointing market performance appears overstated as potential for a substantial and sustained economic recovery remains.

Japan: Global investors increasingly see Japanese equities as a means to access Asian development, especially amidst US-China tensions. Recent wage negotiations between corporates and unions have produced a 3.8% wage hike agreement, the largest in three decades (FIGURE 2). We expect that the Bank of Japan will purposefully exit its ultra-loose monetary policy, which could take place in the second half of this year. If this happens, the yen has room to strengthen further. Corporate governance reforms are also progressing, with the Tokyo Exchange pushing a wide array of firms to increase dividends and buybacks. This has begun to lift valuations from low levels.

India & Southeast Asia: The post-Covid recovery in India and Southeast Asia has been boosted by a substantial rise in investment as global companies seek to diversify their supply chains. The economic recovery is strongest in Thailand, India, Indonesia, and the Philippines, all of which saw stronger earnings growth. Equity prices have rallied in tandem, but continue to lag earnings, so valuations remain at the lower end of their historical multi-year range (FIGURE 3). We expect improved equity performance in the second half of this year, supported by potential weakness in the US dollar, rising demand in the region and increasing direct foreign investment due to US-China strategic competition.