Investors watch the stock market at an exchange on January 6, 2016 in Beijing, China.
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While Asian stocks entered a bull market in januarythe benchmark index for the region has since fallen more than 5% from its peak.
The region’s rally – buoyed by China’s reopening – appears to have hit a wall, but economists say MSCI’s broadest index of Asia-Pacific shares outside Japan has more room to run.
Nomura Asia-Pacific equity strategist Chethan Seth said the firm expects the index to be at 700 by the end of this year – up 8% from current levels as of Wednesday.
“We think Asian equity valuations are still modest,” Seth said, pointing to developments in the region price-earnings ratio of 12.9 despite the rally – versus a US market valuation of 18.5.
Seth added that a recovery in China’s economy and earnings will provide further support, as well as a recovery in fundamentals for technology, memory chips and semiconductors into the second half of this year.
He said recent US data showed further uncertainty about inflation and economic growth.
“In the near term, Asian stocks are unlikely to like this uncertainty, so we expect some near-term volatility until the data re-trends,” he said.
I still expect Asian equities to outperform their US counterparts after a short-term correction on China’s reopening in 2023.
JPMorgan also expects the MSCI Asia-Pacific ex-Japan index to reach 700 levels this year.
“Following this current period of consolidation, we expect MXASJ to test our 2023 bullish target in 2Q2023,” said Wendy Liu, JPMorgan’s chief equity strategist for Asia and China.
“MXASJ may fall [or] consolidate macro resilience concerns in Q3 before recovering in late 2023 and a synchronized recovery in global growth in 2024,” Liu said.
Victoria Harbor and Central Financial District, Hong Kong, China. (Photo by Bob Henry/UCG/Universal Images Group via Getty Images)
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There are uncertainties ahead
The eurozone and the US are on the brink of recession after global central banks aggressively raised rates to tame inflation. Uncertainties about China’s move away from a zero-Covid policy also remain.
“These uncertainties will disrupt rather than derail the structural positive forces we see in Asian economies,” said Minyue Liu, BNP Paribas investment specialist for Asian and global emerging market equities, adding that these factors will only add to volatility in Asian economies. close term.
“Moderate valuations, light investor positions and good fundamentals are buffers that should help Asian stocks weather short-term volatility,” BNP’s Liu said.
She added that domestic demand in the region will be a “driver of economic growth” and expects trade volumes to pick up once the Chinese market reopens.
The China factor
Chinese politics will continue to be a key factor for further growth in Asia-Pacific stocks.
CMC Markets analyst Tina Teng said recent declines in Asia-Pacific shares may have been driven by investors eager to take advantage of China’s reopening.
“The pullback in Asian markets in February may have been due to a technical correction after several months of recovery, as markets were overbought as China began its turnaround on Covid-zero policies, fueling rebounding optimism before the country’s promising economic recovery materialized,” she said.
“I still expect Asian equities to outperform their US counterparts after a short-term correction on China’s reopening in 2023,” she said.
Credit Suisse chief investment officer John Woods said mainland Chinese investors could be a key factor in further strengthening the rally.
“One missing element in China’s equity rally so far has been low participation from mainland investors, which we expect will change as data — and confidence — improves,” he wrote in a note.
“We expect macro momentum to extend into Q2, which should see further moves to rally equities,” he said.