Stock Strategists Predict Asia Market Rally After Terrible 2022

(Bloomberg) — The tide is expected to turn for Asian equities after two dismal years, with China’s economic reopening and a potentially weaker dollar set to drive their outperformance in 2023.

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Regional stocks could climb 9% through the end of next year, according to the average of 11 estimates in a Bloomberg-compiled survey of strategists. Most of the negatives that have weighed on Asia — from a supercharged dollar, China’s Covid lockdowns, and a chip downcycle — are fading, leading to better earnings prospects.

“The environment in Asia equities is one of several pivots happening,” said Frank Benzimra, head of Asia equity strategy at Societe Generale SA, adding that he expects a rebound in earnings to take place from the second quarter.

The MSCI Asia Pacific excluding Japan Index has slumped 19% so far in 2022 following a 4.9% drop in 2021, widening its underperformance versus global peers. Foreign investors have pulled more than $50 billion from emerging markets outside China this year.

Although none of the survey participants see Asian stocks dropping next year, there was a wide dispersion in forecasts — from flat returns to a 15% jump — underscoring caution over global recession risks and a rocky China reopening. While regional gauges may beat the S&P 500 Index according to strategist surveys, they will fall short of recouping their own 2021 peaks even if the most bullish estimate comes true.

A poll of Asia fund managers by Bank of America this month also showed about 90% of the respondents anticipating an advance in Asia ex-Japan stocks.

Biggest Catalysts

China’s rapid disbanding of its Covid restrictions is expected to fuel the flailing economy — and its regional trading partners — with near 5% growth seen in 2023. Another driver will be a weaker greenback, with Bloomberg’s dollar index steadily coming down from its record in September.

Strategists see the initial market rebound being driven by low valuations, followed by a rise in profit expectations. Forward earnings estimates for the MSCI Asia Pacific ex-Japan Index are up 3.6% since early November, suggesting downgrades may have bottomed, while cuts continue for S&P 500 members.

“We think that Asia can outperform in 2023,” Dan Fineman, co-head of Asia Pacific equity strategy at Credit Suisse Group AG, wrote in a note this month. “Global investors will shift funds from the US to Asia on resilient top lines, superior margins and earnings cycles, a weaker dollar and a positive turn on EPS revisions.”

What’s Changing

In a reversal of the trend this year, China will become “investable” again, according to Tina Teng at CMC Markets, helping drive North Asia’s outperformance versus its southern peers.

South Korea — and to a lesser extent Taiwan — are emerging as favorites as they are seen to benefit from an improvement in tech hardware’s inventory cycle. Allianz SE, Morgan Stanley and Goldman Sachs Group Inc. are also among brokers recommending the markets.

“As growth bottoms out, a more cyclical positioning with Korea and Taiwan would make sense,” said Christian Abuide, head of asset allocation at Lombard 0dier. “Valuations are attractive too.”

Views are growing more downbeat for markets in the south. India’s relatively higher valuations after a record-breaking streak could see it underperform, while a hot run in Indonesian equities is fizzling this month.

READ: A Great Rotation Is Brewing in Asia as Investors Head North

Biggest Risks

A key thing to note is that stock pundits tend to be bullish heading into the new year. The predictions for 2022 too were upbeat, as a number of Wall Street analysts had touted China stocks a buy, only to be humbled by an epic rout.

Challenges abound for next year despite all the optimism, with concerns about the timing and extent of China’s reopening a key worry.

There will also be ample global risks with investors watching for potential policy errors by the Federal Reserve and continued disruptions in agricultural supplies due to the war in Ukraine.

“The black swan in the room is the risk of the Fed being ‘too late again’, but this time in cutting rates,” said Havard Chi, head of research at activist firm Quarz Capital Asia Singapore Pte. Generally though, he is bullish on Asian equities and predicts that the MSCI Asia Pacific Index can gain 10-15% by end-2023, driven by improving valuations and earnings.

2023 Targets

* Figures from Bloomberg survey, research notes as of Thursday close.