Leaping ahead in the Year of the Rabbit

After a challenging 2022, Asia is on track for a year where there will be a more positive balance between risks and opportunities. At the start of 2023, many of the headwinds that previously weighed on sentiment have moderated, increasing the chances that rest of the year will be characterised by economic growth, attractive investment themes in financial markets, and progress in green finance, according to the HSBC Asian Outlook 2023.

The economic impact of the pandemic was smaller in Asia than in other parts of the world. Part of this was due to continued trade, which received a boost after the demand for goods produced in Asia surged during the lockdowns of 2020. The result is that industrial production in emerging Asia is now significantly higher than before the pandemic.

Fears of a recession in the US however, suggests that orders from the world’s largest economy will soften, weakening a major source of demand for Asian exports. On the other hand, China’s relaxation of COVID-19 restrictions will not only improve its own economy, but also have an impact across the entire region – increasing demand for commodities from Australia and Indonesia, while Chinese tourists will start to visit popular destinations like Thailand.

“A recovery in mainland China should help put a floor on Asian trade,” said Mr. Neumann, who explained how 6.5% of regional GDP is generated by demand for the trade of goods and services from China. “Intra-regional trade is becoming more prominent, making the region less dependent on demand from other parts of the world. Bilateral trade between China and ASEAN is larger than between China and the US, making it arguably among the most important trade relationships in the world right now,” he said.

In terms of other macroeconomic indicators, Asia is relatively strong – inflation has been more moderate than in other regions, there has been less monetary tightening, and private sector borrowing has stabilised as a proportion of GDP.

In India, economic indicators do not show a uniform picture. External demand is slowing, domestic demand remains robust, while investment has been more resilient than consumption. The country’s growth potential remains at around 6% per year, though GDP expansion will be slightly smaller in 2023 – in the 5.5% to 6% range¹.

Around the same time China relaxed its pandemic controls, it also implemented several measures to help the struggling property market. The so-called “three arrows” aim to help developers to access funding from different channels – including loans, equity finance and bond issuance. These new policies were a “game changer”, according to Keith Chan, Head of Asia Credit Research, HSBC, who anticipates that 2023 will be a good year for high yield China property bonds.

Policy support has already resulted in a rapid recovery in bond prices. In October 2022, over 80% of US dollar denominated Chinese property developer high yield bonds were trading at 20 cents on the dollar or less. As of mid-January, only around 40% were trading at these distressed valuations.

Can the rally be sustained? Mr. Chan believes it can, although he notes that the market’s upward movement will be volatile and not follow a straight line, meaning that investors should pay attention for the right entry points.

At the start of 2023, there are several standout investment themes for equity investors in Asia, according to Herald van der Linde, Head of Equity Strategy, Asia-Pacific, HSBC.

The first is China’s reopening. “This sets the stage for a recovery in the world’s second largest economy. The question is how big that recovery is going to be,” he said. The challenge here is finding value, as many stocks tied to this theme have already enjoyed significant rallies in the last quarter of 2022.

The second theme relates to the reshuffling of supply chains across Asia, with ASEAN and India receiving high levels of foreign direct investment (FDI) to set up factories – in industries like technology and electric vehicles. These are structural growth stories that are attractive because they unfold despite the macro fluctuations, said Mr. van der Linde.

The rise of green bonds is one of the most important investment trends in Asia, as these financial instruments help finance the energy transition, as well as other sustainability projects. An increasing amount of private capital is being mobilised, alongside money from multilateral financial institutions – resulting in more public private partnerships.

In the regional US dollar denominated ESG bond market, 2023 will be characterised by persistent demand, better returns and rising standards, said Louisa Lam, Asia Credit and Green Bond Analyst, Asia Pacific, HSBC.

Demand for ESG labelled bonds remains healthy, following two years of heavy issuance in 2021 and 2022. Investors are adding these bonds to their portfolios due to a desire to integrate material ESG factors into their investment decisions, while impact investing is a small but growing driver. Strong returns also play a role, with investment grade ESG labelled bonds outperforming their peers in most markets in 2022.

With China reopening, strong investment flows into ASEAN and India, as well as growing demand for green bonds, Asia started the 2023 on the front foot. Reconfigured supply chains and evolving trading link not only make the region resilient to external factors, but also create attractive investment themes for equity investors. The increased emphasis on ESG also means future development will be more sustainable. Taken together, these factors suggest the Year of the Rabbit will be a positive one for Asia.