Five Things to Watch in Asia Stocks After $5 Trillion Wipeout

(Bloomberg) — Turnaround hopes for Asian equities abound after a near $5 trillion wipeout in valuation, with investors betting some of the biggest bugbears of last year will evolve into tailwinds for 2023.

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A full reopening of China and a slowdown in the Federal Reserve’s tightening cycle will be key drivers for the MSCI Asia Pacific Index to snap back from its worst year since 2008. Signs of relief have emerged as Beijing abandons its Zero Covid policy and the dollar edges down from its peak, but bruised investors will need more catalysts.

Overall, expectations are for Asia to outperform the US. A bottoming out of the chip downcycle will be closely watched for the tech-heavy markets of South Korea and Taiwan, while the Bank of Japan’s hawkish pivot may have ripple effects across the region.

“Modest valuations, light investor positioning and good fundamentals are buffers that should help Asian stocks withstand near-term volatility,” said Zhikai Chen, head of Asian and global emerging market equities at BNP Paribas Asset Management.

Here are some factors that could determine how 2023 shapes up for Asian equity markets:

China Revival

A rebound in Asia’s largest economy will be key to revving up profits across the region. But the strength of market recovery will depend on how China’s Covid outbreak pans out, with concerns growing over disruptions to global supply chains. The Lunar New Year holiday may also spur further infections.

Covid spread “will weigh heavily on China’s consumption and economic growth, at least for the first half of 2023,” Amir Anvarzadeh, strategist at Asymmetric Advisors Pte. wrote in a note.

The subsequent economic recovery could also mean more demand for raw materials and higher inflation, complicating global central banks’ rate paths.

Political events including the National People’s Congress in March will be monitored for cues on more pro-growth policies. Meanwhile, the outlook for the property sector remains dim, with shares nearing a technical bear market despite Beijing’s policy support.

Dollar’s Descent

A supercharged greenback for much of last year weighed on Asian stocks, with those with heavy dollar-based borrowing and importers feeling greater pain. The MSCI Asia Pacific Index’s 19% decline in 2022 erased $5 trillion of dollars in the member companies’ market value.

The pressure has started to ease as expectations grow for the Fed to turn less hawkish, allowing the Bloomberg dollar gauge to decline since September.

Foreign investors may return after withdrawing nearly $60 billion from emerging Asian equities outside China in 2022, the biggest outflow since Bloomberg started compiling annual data in 2010.

Chipper Chipmakers

South Korea and Taiwan, which house the world’s largest chipmakers including Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co., had a tough year as demand for electronics receded and higher borrowing costs battered tech stocks.

Investors are watching for the bottoming out of earnings and capex cuts, with many expecting a turnaround in the second half of 2023. Stock markets have been quick to reflect such optimism.

But the Biden administration’s bid to curb Beijing’s tech ambitions may affect businesses of TSMC as well as Asia’s other chipmakers and equipment manufacturers, as the US tries to engage other countries in its effort. China’s state support for its semiconductor industry should offset some of the bad news.

Geopolitical Tensions

While a raft of factors point to a better year ahead, investors are taking optimism with a dose of caution amid the risk of a flareup of geopolitical tensions.

The Sino-US relations appear to have taken a turn for the better, but disagreement over the status of Taiwan and lingering uncertainty over an auditing spat are keeping bullish China bets in check.

Analysts say geopolitical risk is one of the factors reflected in the MSCI China Index’s valuation, which is below the average historical gap to its global counterpart.

Hawkish BOJ

The Bank of Japan’s surprise move in December to double the cap on bond yields has spurred expectations of further hawkishness. That will likely bolster the yen and weigh on the nation’s exporters, such as tech and automakers.

The market’s performance will sway the MSCI Asia gauge, which counts Japanese stocks as the biggest component with a 32% weighting.

Any further shifts by the BOJ will have impacts beyond Japan and Asia, given that Japanese firms and individuals are major buyers of overseas assets and the yen is an important global funding currency.

–With assistance from Abhishek Vishnoi.