Asia’s Growth Amid Downturn in Developed World
China’s faster-than-expected reopening and consumption-led recovery have provided a notable lift to Asian economies, supporting a broad-based improvement in manufacturing and services PMIs across the region. Given that China is the single largest trading partner of 16 major economies in Asia, its demand recovery helps mitigate the drag from the global downturn for Asian exporters. New orders in Asia have already recovered to expansionary territory in January and have continued to improve in the first quarter. The pace of new export orders contraction has slowed considerably in the Asian exporting economies.
Upside surprises from China’s manufacturing and services PMI data reaffirm that the economy is on track to stage a strong cyclical recovery in 2023. We expect China will deliver a speedy growth acceleration from 2.2% y-o-y in Q1 to 7.4% in Q2, 5.5% in Q3 and 6.9% in Q4, lifting full-year GDP growth back to 5.6% in 2023 from 3.0% in 2022. We expect China can overachieve the conservative 2023 GDP growth target of “around 5%” set at the annual National People’s Congress in March.
In contrast to the growth downturn in developed economies, which is exacerbated by the tightening credit conditions caused by the banking sector turmoil in the U.S. and Europe, Asia stands out as the only region that is expected to deliver growth acceleration to 4.7% in 2023 from 3.5% last year. Alongside China’s recovery, India’s service sector boom is reflected by the surge of its services PMI to 59.4 at a 12-year high in February, adding momentum to Asia’s resilient growth in these uncertain times. The recent market turmoil triggered by Silicon Valley Bank (SVB) and related banking events have added to the market uncertainty. We believe a systemic banking crisis should be averted but the market volatility may persist. We see the Asian markets as relative safe havens in the volatile markets.
Asian Banking Sector Resilient to Contagion Risks
Against the backdrop of heightened banking sector volatility in the U.S. and Europe, the Asian banking sector has stayed resilient to withstand contagion risks. Thanks to the robust capital adequacy ratios, liquidity positions, diversified business models and the broad and stable retail deposit base, Asian banks stand out as relative safe havens amid the sector uncertainty. In Hong Kong and Singapore, the total deposits have increased significantly. Asian banks do not have mismatch in asset and liability maturity because they have been prudently regulated after the 1997-1998 Asian financial crisis.
In our view, Asian banks have built strong capital buffers to resist recent volatility in the AT1 bond market, thanks to their much higher CET1 capital ratios versus regulatory requirements. In particular, mainland Chinese banks are insulated from the banking turmoil in the developed economies due to their domestic-oriented business portfolios and loan book. ASEAN banks are also well diversified across different industries and geographies within the region.
Positioning in Reopening Winners in China and Asia
We are fully overweight on China and EM Asia equities due to their resilient domestic fundamentals, positive growth outlook and attractive risk-reward profile. China’s policy pivot towards growth stabilisation is strategic and supported through multiple policy levers, and is less prone to U-turns than many investors seem to fear. China’s consumption-led recovery will not only support Asia growth but will also reduce the risk of a global recession.
Our high conviction theme on Asia’s reopening winners position in the beneficiaries of China’s speedy reopening and resumption of international travel. We favour quality leaders in travel, airlines, mass consumption, hospitality, food and beverages and Macau gaming sectors. China’s rapid reopening should lead to broadening of economic recovery; we like blue chip Chinese internet leaders which will benefit from the more supportive government policy, asset restructuring and fundraising opportunities, better growth outlook and improving consumer confidence. China’s accelerating housing recovery will boost demand for metals and construction equipment.
In Hong Kong, we see positive recovery outlook for the retail landlords due to expected improvement in occupancy rates, positive rental reversion and additional revenue from turnover rents. We think the insurance sector in mainland China and Hong Kong can benefit from a normalisation of activity levels, just as banks and stock exchanges can.
The ASEAN economies also emerge as major beneficiaries of China’s border reopening, as Thailand, Vietnam and Singapore are the top three travel destinations in Southeast Asia most favoured by mainland Chinese tourists. In Thailand and Vietnam, Chinese tourists made up about 30% of their overseas visitors before the pandemic. In Thailand, the government targets 5 million tourists from mainland China to visit the country this year, implying total tourist arrivals will almost triple 2022’s levels. According to the United Nations World Tourism Organization, last year the return of international visitors to Asia Pacific only reached 23% of pre-pandemic levels, setting the stage for a strong recovery to take place in 2023.
Green Transition and ASEAN Growth
Asia’s green transformation continues to be our high conviction theme, focusing on opportunities from the energy transition and independence, green infrastructure development and innovation of new energy vehicles technologies in the region. According to McKinsey, the addressable market size for green businesses in Asia is expected to reach between US$4 trillion and US$5 trillion by 2030, as sustainability is increasingly valued by various stakeholders, including investors, customers and employees.
China’s transition towards renewable energy and electric vehicles is well underway, backed by strong policy support and catalysed by the global energy crisis. During the March National People’s Congress, the government announced fiscal stimulus measures, including targeted tax cuts and fee reductions for green transition and exemptions of purchase taxes for new electric vehicles. Following the normalisation of construction activities post-Covid, our 2023 solar installation forecast for China is now at 120 GW, translating into robust growth of 38% y-o-y. On the other hand, energy storage is gaining traction, in particular batteries that are used in new energy vehicles and the renewable energy industry.
Apart from cyclical catalysts, the ASEAN economies ride on structural growth tailwinds in the next decade with the economic gravity shifting to Southeast Asia. Our high conviction theme on “ASEAN Tigers” captures secular growth opportunities in ASEAN consumption companies, infrastructure plays, banks and Singaporean REITs. ASEAN economies were supercharged by robust domestic demand and reopening tailwinds in 2022. We expect consumption to stay supportive of growth, though with a smaller impact given slowing global growth and base effects.
Asian Quality Credit for Resilient Carry Opportunities
As the Fed is stepping closer to the end of its tightening cycle, we see an improving outlook for the Asian credit market. We are bullish on the theme on Asian quality credit as we see an opportune time to switch from time deposits to high-quality credits to lock in yields at attractive levels. Within Asian fixed income, our duration preference remains short to medium, taking advantage of the inverted credit curve.
In terms of high-quality corporate bonds in Asia, we find a few sectors offering attractive investment cases, including high-quality Hong Kong corporate bonds which enjoy reopening tailwinds, Chinese technology, media and telecommunications (TMT) bonds on the back of normalisation in regulatory environment and Indonesian quasi-sovereign high-grade bonds given the country’s improving fundamentals.
Within the China property credit market, we continue to prefer higher quality issuers including the state-owned developers which have much stronger financial positions compared to privately-owned and highly geared developers.
About Fan Cheuk Wan
Fan Cheuk Wan is a member of the Global Investment Committee for Global Private Banking and Wealth and Chair of the Regional Investment Committee in Asia. Fan has 28 years of investment experience and is responsible for developing investment strategies and themes across all asset classes for private banking and wealth clients in Asia. With her investment expertise and wealth of market knowledge, her views are always sought after by the media, including Bloomberg TV, CNBC, Cable TV, NOW TV and Channel NewsAsia.
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