Analysts at JPMorgan expect that in 2023, Southeast Asian markets will see a “sharp decline followed by a rapid rally higher (bear market rally) followed by further decline before markets eventually settle at the bottom.”
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According to analysts at JPMorgan, Southeast Asia’s markets will bungee jump-like and plummet in 2023 before surging in the second half of the year.
This will likely be marked by a “steep decline followed by a rapid rally higher (bear market rally) followed by further decline until markets finally settle at the bottom,” analysts led by Rajiv Batra wrote in a report. They attributed this to weakened purchasing power amid tightening monetary policy, lower savings and higher borrowing costs.
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JPMorgan expects the MSCI ASEAN Index to “retest this year’s lows and potentially drop even lower” in the first half of 2023, weighed down by weaker external demand, tightening financial conditions and a “fading” reopening push, among others becomes.
The MSCI ASEAN Index fell 22% from February’s high to its yearly low in October. The index subsequently rallied 10%, buoyed by hopes of a reopening of China and a US Federal Reserve turning point.
China’s reopening momentum is likely to be modest given global recessionary conditions.
The Index measures the performance of large and mid-cap stocks in four emerging markets, one developed market and one frontier market. In total, it has 170 constituents in Singapore, Indonesia, Malaysia, the Philippines, Thailand and Vietnam.
Fed interest rates are expected to hit 5% by May and a US recession is expected by the end of the year.
But “contrary to what investors might think, the stock market hasn’t fully priced in a recession by the time it happens,” the report said.
Trade-oriented economies such as Singapore, Thailand, Vietnam and Malaysia will be particularly affected by slower global growth and weaker demand for consumer durables.
A disease control worker outside a government quarantine facility in Beijing on December 7, 2022.
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Additionally, China’s expected easing of Covid restrictions is unlikely to offset the projected slump.
The Thai economy, for example, is expected to be hit by a “significant contraction” in exports, private investment and manufacturing, with analysts at JPMorgan downgrading their forecast for 2023 gross domestic product growth to 2.7% from 3.3%.
Singapore is also expected to face more difficult macroeconomic conditions.
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“We assume that the slowdown in foreign demand will continue to slow down [Singapore’s] Goods producing sector, although the service sector provides some balance.
Singapore’s forthcoming tax hike on goods and services – from 7% to 8% – would also dampen consumer sector demand and prospects, JPMorgan said.
China’s “reopening momentum” is also seen as modest given the recessionary conditions around the world.
Mainland China has eased many of its strict Covid controls over the past week, with national authorities announcing a range of sweeping changes such as:
“The benefits of China’s reopening will be offset by recessions in developed markets,” analysts at JPMorgan told Health & Fitness Journal, adding that Southeast Asian markets are heavily dependent on exports and demand from developed market economies.
People are seen on the sidewalk overlooking Marina Bay Sands hotels and resorts in Singapore on November 19, 2020.
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But China’s reopening to international travel, if it happens, would be a “positive catalyst” for Singapore’s economy. Chinese tourists accounted for around 20% of tourist arrivals in Singapore in 2019, whose return also “could have side effects [Singapore’s] consumption and travel-related services.”
Still, JPMorgan estimates that the upside will likely still be limited by the aforementioned global recessionary conditions and the external demand challenges the country is facing.
A full reopening of the border from China would also add “potential benefits” to Thailand’s tourism recovery, and that could be inflationary, according to the report.
“There is an argument that China’s earlier-than-expected reopening of borders is inflationary,” JPMorgan said. While tourism can boost wage gains and consumption, it is not closely correlated with inflation in countries like Thailand, where the nature of inflation is primarily supply-side, the analysts added.