The Chinese stocks became a target in Israel after the fall of Altshuler Shaham Eitan in the last two years. In general, Asia doesn’t sound too attractive to Israeli ears, but should investments there be rejected outright? Not sure. This year Asia is falling much less than the US. Thus, the Japanese Nikkei fell by only 8%, the Shanghai fell by 16%, the Hang Seng by 18%, and the Kospi by 23%. Sydney fell by only 6%. In comparison, the Dow Jones fell 9.6%, the S&P 500 fell 20% and the Nasdaq lost 33%.
In any case, there are those who believe that the ‘bad news’ is already embodied in the Asian markets, so the chances of further declines in Asia are low, while the upside potential is high. This is how Manraj Sekhon, chief investment officer in emerging market stocks at Franklin Templeton, predicts a potential rebound in emerging market stocks in 2023, when Asia will be the engine of growth, with an emphasis on India and China, and on the other hand, growth will moderate in the Middle East and Latin America.
According to him, despite an asymmetric return profile in 2023, “possible and well-known negative news (such as inflation, war and growth in China) will likely have a limited negative impact on the markets, while positive news can lead to significant gains.”
He identifies 4 factors that will be possible catalysts for the recovery of emerging market stocks in 2023. These include:
1. The record inflation data in the US and the weakness of the dollar.
2. Recession risks are known in the United States and the European Union (EU).
3. A turning point for Chinese growth and the zero-sum policyCOVID its.
4. Greater resilience inEMsproviding uncorrelated growth opportunities
“The easing of bottlenecks in the supply chain, caused as part of the negative impact on growth from high interest rates, will likely drive the decline in inflation. With the peak of inflation behind us, investors can focus on the consequences of a change in the pace of rate hikes by the US Federal Reserve. These include the weakening of the US dollar and a reduction in the equity risk premium – both positive for emerging markets. We believe that the recovery will be accompanied by an influx of funds into these markets which will be accompanied by a decline in the US dollar as investors turn to higher growth markets.
In addition – “the risks of recession in the United States and the European Union in 2023 are contrary to the growth trends of EM. We expect growth in China to accelerate in 2023, due to the recent changes in the Corona policy.EM remains relatively flexible – Asia will be a growth engine at a time when the Middle East and Latin America are moderating.”
And what about China?
“China’s inflection point began with the easing of access to credit for the real estate sector in October. After that, a significant reset in US-China relations at the meeting of theG20 in Bali between President Xi Jinping and President Joe Biden in November 2022, which substantially lowered tensions between the two countries. The final catalyst was a change in China’s attitude towards governance COVID-19following the successful conclusion of the 20th National Congress of the Chinese Communist Party held in October 2022.
“The leadership in China has belatedly recognized that the greater risk it faces is no more COVID-19, but the imperative of growth. Therefore, she makes a pivot in her priorities – moving away from trying to suppress the COVID-19, for a policy of living with the virus. Party leaders are now focusing their efforts on boosting growth and consumer confidence. This transition is critical, in light of poor economic data and weak consumer confidence – culminating in recent unrest over the uneven implementation of the zero policy –COVID its.
“China’s exit from its virus suppression policy will not be linear and we should expect some reversals. A rise in the death toll and the strain on its underdeveloped hospital system are among the biggest risks it will face. This is similar to what other regions have witnessed as they come out of lockdown. For the markets , that change, is the most important marker. Investors are likely to look through policy reversals to see the true economic impact of a reopening. In Sekhon’s view, the performance of other markets after the reopening provides a template for investors.”
How did the emerging markets survive the strengthening of the dollar?
“The resilience of EMs Against a significant strength of the US dollar in 2022 is reflected in the positive relative performance of individual markets such as India and Indonesia. These trends reflect earlier economic reforms and a higher share of domestic demand in India and Indonesia. In the case of Brazil, solid fundamentals and an early move advantage in raising interest rates allowed the country’s market to outperform the index MSCI World . The local currency in Brazil (FX) recorded increases against the US dollar in the weighted trade.
“While China was severely affected by the policy of zero-COVID It, South Korea and Taiwan – both heavily dependent on global trade – have been hit by a slowdown in demand for semiconductors. These uncorrelated returns reinforce the need to look at EMsthe various emerging markets separately.
“Looking ahead, we expect 2023 to be positive forEMs, which reflects their economic resilience, and the robust local demand. In China, we expect the release of pent-up demand as it moves away from the zero-COVID its for a strategy focused on growth.”