Asian equities are likely to extend their gains as the year progresses, boosted by the region’s relatively better growth prospects and a broadening economic recovery in China.
That’s the view from majority of the 19 strategists and money managers surveyed by Bloomberg News. The MSCI Asia Pacific Index is expected to rise to 178.5 by Dec. 31, implying a 9.6% upside from current levels, according to an average of 10 responses in the poll conducted late last month. That’s slightly higher than the level the Asian stock benchmark traded at in March 2022, when the Federal Reserve delivered its first rate hike in three years.
Investor optimism is strongly tied to bets that the Fed will pause its rate-hiking cycle this year, helping soften the dollar and burnishing the appeal of emerging markets in Asia. Survey respondents said they are also counting on a strong rebound in China, the region’s growth engine. Most of them expect Chinese stocks to lead Asia gains because of their low correlation to any global downturn.
The MSCI gauge “will rally 10%-15% from here by the end of this year due to the region’s growth differential and prospects of Fed easing,” Wong Kok Hoong, the head of equity sales trading at Maybank Securities Pte., said in a virtual interview. Chinese equities will helm the advance as the nation “has become more pro-growth,” he added.
Valuations are another reason investors are optimistic about Asia. The MSCI benchmark rose 4.1% in the three months to March 31, marking its second quarterly gain after five consecutive declines. Still, the gauge is trading 13.2 times its one-year forward earnings versus a five-year average of 14.2.
The S&P 500 Index is trading at a multiple of 18.3 times versus a five-year average of 18.7. It climbed 7% last quarter.
Southeast Asian equities also emerged as a favorite among some market participants on expectations that domestic demand in the region will remain strong, monetary policy tightening will pause and inbound tourism will improve.
In terms of sectors, most respondents said they are positive on technology and financial stocks, which account for more than 40% weight in the Asian gauge. Some recommend adding defensive assets to the mix, while others favor Chinese technology shares.
CMC Markets’ analyst Tina Teng was the most optimistic on the Asian benchmark’s trajectory among those surveyed by Bloomberg. She sees the gauge rising to 220 by year-end.
For Asia, “we see about 12%-15% upside from current levels, driven by 20% upside in China,” said Herald van der Linde, head of Asia equity strategy at HSBC Holdings Plc. “We expect a recovery in earnings in China and secondly, we expect US bond yields to fall as worries about inflation recede.”
To be sure, Asia’s equities face numerous roadblocks on their way back to pre-Fed tightening levels.
According to the survey, the largest risks for the region are the US banking crisis snowballing into a bigger global problem, an escalation of US-China tensions and a deeper-than-expected recession in the US. The surprise decision by OPEC+ to cut oil production — which came after the survey results — also risks adding to inflationary pressures that may force central banks around the world to keep interest rates higher for longer.
“We remain alert to possible risks such as elevated inflation, a global economic recession and geopolitical tensions,” said Jihong Min, portfolio manager at T. Rowe Price. Still, “we believe that the Asia ex-Japan region is better positioned than most developed markets on several fronts, including macro conditions and demographic dividends.”
Meanwhile, a separate survey by Bloomberg signaled China’s reopening trade will gain a second wind this quarter, with the projected level for the CSI 300 Index around the highs reached just after the nation abandoned its Covid curbs.
China equities will outperform in Asia this year given “modest equity valuations and scope for earnings upgrades through the year as economic recovery broadens,” Chetan Seth, a strategist at Nomura Holdings Inc., said by email.
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