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Article | 22 March 2023 | Market updates
Thomas Vogl, CFA, FRM
Senior Investment Analyst, Architas
Widespread evidence of a resurgence
The lifting of China’s zero-Covid policy has resulted in a resurgence in the domestic economy. Evidence is widespread, from the strongest manufacturing orders for a decade to a recovery in passenger numbers on China’s metro, which is significant for the recovery of the services sector. And the so called ‘revenge spending’ of the savings amassed during the pandemic is giving international travel and luxury goods a big uplift.
The National People’s Congress (NPC) has set a growth target for 2023 GDP of ‘around 5%’. Consumption will be the driver of growth this year and the NPC is making this a top priority, with a more pragmatic policy stance towards real estate and internet platforms. Job creation and foreign investment also sit high on the priority list. Monetary policy will be both ‘prudent and targeted’.
High-frequency macro and industry data show clear signs of activity normalisation after reopening. The latest Purchasing Managers’ Index (PMI) data hit the highest level for a decade, with the manufacturing PMI of 52.6 beating expectations of 50.6, while the non-manufacturing PMI hit 56.3 against an estimate of 54.0. The services sector survey for February jumped to 55.0, after 52.9 in January. Despite this surge in demand, inflation looks likely to remain contained, with the official target for 2023 at 3%. This is in contrast to other major economies, where inflation is much higher.
But to what extent is this growth rebound likely to spill over into the rest of the world? The obvious beneficiaries are China’s near neighbours, which export more goods to China than many western economies. And indeed, some macro data has also picked up, while remaining in contraction territory due to slowing global demand. The return of Chinese tourists to the rest of Asia and the spending of Chinese savings should serve as a positive tailwind for Hong Kong and Thailand.
Rising demand will also be felt by commodities markets, in particular for oil, as China is the world’s biggest importer. It is estimated that demand from China could rise by 1 million barrels per day, and given supply constraints, this looks set to push oil prices higher.
Our view
We maintain our positive view on Asia ex-Japan equity markets near term, given the improving growth potential and the scope to revise corporate earnings upwards. Despite the recent pause in the reopening rally, momentum here should remain positive and the markets are far from expensive or overcrowded.
The risks for Asia ex-Japan equities include a hard landing in the US economy or renewed strength in the US dollar, due to safe haven flows. It’s also worth bearing in mind that international investors could choose to play the China reopening story via proxies, such as the European equity markets, noted for their exposure to changes in Chinese demand.
As ever, we recommend a diversified investment portfolio and would avoid putting all our eggs in one geographical basket. A broad spread of asset class exposure can minimise the risks associated with any one area.
