Asia’s growth is getting back on track. 2023 outlook for Asian Equities from Invesco’s Mike Shiao

by | Dec 8, 2022

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Mike Shiao(pictured), Chief Investment Officer, Asia ex Japan, Invesco, shares a positive outlook for Asian equities for the year ahead


  • Invesco believes Asia’s economic growth will get back on track on 2023.
  • India is fast-growing and contributes meaningfully toward Asian and global expansion.
  • China remains focused on high-quality growth and to achieve a moderately prosperous society
  • Taiwan and Korea tech equity valuations have lowered to comfortable levels and we hope to see a rerating of the sectors next year.
  • The unique economic dynamic of the region as well as the attractive valuations of Asia ex-Japan equities can provide global investors with good opportunities for diversification in 2023.

Asia’s growth opportunities

We believe Asia’s economic growth will get back on track in 2023. The region is home to some of the fastest growing economies in the world. Asia ex-Japan’s GDP is forecast to maintain a higher growth rate than other developed markets.1

Asia ex-China markets have already opened up after Covid-related lockdowns and we have seen economic data picking up in recent months. We believe this trend is likely to continue driven by robust recovery in domestic demand.

 
 

Within Asia, India is one of the fastest growing economies and is likely to deliver GDP growth in high-single digit and with an average growth higher than other Asia countries, over 2022 to 2023, contributing a significant portion to Asian and global growth.2 We see huge potential for growth in India which can lead to diverse investment opportunities.

We expect China, the world’s second-largest economy, to gradually reopen in 2023. In its quest to focus on high-quality growth and achieve a moderately prosperous society, we expect China’s GDP to stabilize at mid-single digit in the next few years. Although China’s growth is likely to be lower than the near ~10% growth in earlier years, this stable growth level can still provide a supportive environment for bottom-up stock selection.

North Asia is expected to shine in 2023

 

Within North Asia, Taiwan and Korean markets have been impacted by softening global demand. In addition, the equity valuations in these two economies have lowered to comfortable levels. MSCI Korea and MSCI Taiwan have been trading at a -1 standard deviation of their historical average.3 Valuations of Korea and Taiwan technology stocks have been trading at significant discounts compared to US technology stocks.4

Both Taiwan and Korea’s economies are very competitive in the technology sector. Korea specializes in producing DRAM (dynamic random-access memory) chips, while Taiwan has strong capabilities in manufacturing a wide range of semiconductor chips. We believe that the cyclical slowdown of the tech sector is a short-term phenomenon. We plan to closely monitor and hope for a potential re-rating of the sector in 2023.

We also believe the potential reopening of China can benefit the country’s domestic market and be an extra driver for Asia’s overall growth. A rebound in China’s pent-up domestic demand is expected to result in a strong boom in trade, exports, and growth in neighboring Asian countries.

 

Chart- Korea technology stocks have been trading at attractive valuations

Past performance does not guarantee future results. An investment cannot be made in an index

India and ASEAN countries have already reopened and are driving further growth

 

India and ASEAN countries reopened in mid-2022. In India, recent high- frequency data, including manufacturing PMI and credit data, indicates positive growth. We believe India’s supportive policies coupled with their large domestic demand base can offer another engine for Asia’s growth.

We also hold a positive outlook for ASEAN countries that have benefitted from travel and tourism and have contributed significantly to Asia’s economic recovery. Since tourism and related industries contribute around 12% of the ASEAN countries’ GDP5 , we anticipate that the spill-over effects of this could lead to a strong recovery of international activities and domestic demand that can further boost their economies.

Asia ex-Japan possibly better placed with regards to FX risk

 

Asia ex-Japan currencies spiraled downward against the US dollar in the latter half of this year mainly due to the strong dollar. This has not been specific to Asia ex-Japan but has also impacted the rest of the world. The Japanese Yen, for example, has depreciated more than 20% year- to-date6. That said, Asia ex-Japan is in a stronger financial position given the reduced foreign debt levels, stringent bank leverage ratios and sound monetary policies of their markets. In addition, as China aims to have a relatively stable Renminbi, we expect the People’s Bank of China (PBOC) to continue to implement accommodative monetary policy in order to stabilize the Renminbi.

Asia ex-Japan equities have been trading at attractive valuations

MSCI Asia ex-Japan was trading at 11.3x7 for a 12-month forward P/E as at the end of September, which is close to the low end of the 5-year range. Asia ex-Japan equities have been trading at a large discount (~27%)8 against the US equity market. The relative price-to-earnings ratio for Asian equities compared to US equities provides a better valuation discount for the former in the face of global macroeconomic headwinds. The unique economic dynamics of the region as well as the attractive valuations of Asia ex-Japan equities can provide global investors with good opportunities for diversification.

 
  1. Goldman Sachs estimates, September 2022
  2. Morgan Stanley Research, August 2022
  3. Note: Valuation was measured using MSCI Korea and MSCI Taiwan’s 20 years range. Factset, MSCI, September 2022
  4. Goldman Sachs Global Investment Research, September 2022
  5. Nikkei Asia, June 2022
  6. Bloomberg, September 2022
  7. Factset, MSCI, September 2022
  8. Goldman Sachs Global Investment Research, September 2022

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