2023 Investment Outlook – Asia Equities

Asia’s growth is getting back on track
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 reach over 4.7% in 2023 and the region is expected to maintain an average growth rate of over 4% looking ahead.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 an average of 7% growth over 2022 to 2023, contributing 28% and 22% to Asian and global growth respectively.2 We see huge potential for growth in India which may 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 around 5% 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 may 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. The equity valuations in these two economies have lowered to comfortable levels. MSCI Korea and MSCI Taiwan are trading at a -1-standard deviation of their historical average.2 Valuations of Taiwan technology stocks in particular are trading at 36% discount compared to US technology stocks.3
Source: Goldman Sachs Investment Research, October 2022
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 and as these economies’ domestic markets reopen, this can benefit the industry overall. We plan to closely monitor these developments 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.
South Asia and Southeast Asia countries have already reopened and are driving further growth
South Asia and Southeast Asia 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’ GDP4, 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 is 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-date.5 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. Compared to decades earlier, Asia ex-Japan’s free-floating currencies ensure these economies are relatively well placed. 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 are trading at attractive valuations
MSCI Asia ex-Japan was trading at 11.3x6 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 are trading at a large discount (~27%)7 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.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.
Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.
Footnotes
-
1
Goldman Sachs estimates, September 2022
-
2
Note: Valuation was measured using MSCI Korea and MSCI Taiwan’s 20 years range. Factset, MSCI, September 2022
-
3
Goldman Sachs Global Investment Research, September 2022
-
4
Nikkei Asia, June 2022
-
5
Bloomberg, September 2022
-
6
Factset, MSCI, September 2022
-
7
Goldman Sachs Global Investment Research, September 2022