Relative to the US, an opposite dynamic is currently unfolding in China, says Citi’s chief investment strategist and chief economist Steven Wieting. “Property and trade sectors are much larger shares of China’s economic activity, and the larger structural changes needed to clear major imbalances have not been sufficiently implemented.”
In the near term, these headwinds pose a great challenge for China’s policymakers, adds Wieting in Citi’s 2024 outlook. However, China’s struggles are lowering the cost of goods worldwide at a time when inflation concerns remain high.
This weakness “looks entrenched” as Beijing struggles to find a new economic engine that does not rely on exports or property excess, according to a team of JP Morgan Asset Management analysts led by London-based Karen Ward, chief market strategist for Europe, the Middle East and Africa (EMEA).
“While the Chinese government has announced several stimulus measures, none equate to the large-scale programmes of the past, so China looks likely to grow at much lower levels than in recent decades.”
Citi’s Wieting, however, thinks the stimulus measures undertaken by the Chinese government in recent months have been “significant”, enough to possibly trigger a cyclical recovery in 2024 and into 2025.
See also: ECB delivers landmark rate cut but few signals top
Likewise, JP Morgan’s Asia equity strategist and head of its Southeast Asia strategy team thinks the China rally is still in play.
Rajiv Batra, who is based in Singapore, notes that China equities delivered a “volatile up-move” in November 2023 from a starting point of extreme pessimism and cheap valuations.
This should continue as policy support widens, growth bottoms out, geopolitical risks moderate and attempts are made at resolving structural issues, he adds.
See also: ECB holds rates and signals cuts are still some way off
Moderate yet extensive support measures since August 2023 were followed by a “surprising” RMB1 trillion ($0.19 trillion) fiscal boost in October 2023, says Batra. “More measures appear forthcoming, and there remains upside risk in China equities even from meaningful financial sector reform with domestic long-term capital buying China equities, a stable US-China relationship and a stable to appreciation bias of the RMB versus the US dollar.”
China offers value
Growth should turn steady in many places around the globe, says HSBC’s chief Asia economist Frederic Neumann, and mainland China’s economy should expand by around 4.9% this year.
While this is “a touch slower than in 2023”, Neumann thinks the 2024 forecast signals “an arguably better performance” as base numbers are no longer depressed. “The property sector will remain a drag for some time yet, but there are pockets of growth, driven by support for areas like manufacturing investment.”
Fidelity International’s global head of macro and strategic asset allocation Salman Ahmed thinks China has “firmly” entered a phase of controlled stabilisation as a cyclical recovery takes hold.
China’s growth is likely to range near 5% in 2024, holding steady from 2023, he adds.
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“A range of policy shifts, which started in July, are starting to bear fruit and we think domestic macro stability is likely to re-emerge in 2024. As a result, we see several opportunities arising for investors,” says Ahmed.
China offers value as the macrocycle stabilises and growth expectations rise from the current depressed levels, says his colleague Matthew Quaife, who is the global head of multi-asset investment management.
Stronger household spending, supported by the large excess savings accumulated during the pandemic, will benefit consumer sector stocks, adds Quaife. “Chinese equities that currently offer attractive valuations compared to most other regions, as well as cyclical stocks including shipping, industrials and the oil services sector, will also benefit from rising economic output.”
HSBC’s Greater China chief economist Liu Jing sees balanced risk for the world’s second-largest economy. “The property sector remains a key downside risk, while a global demand slowdown could also weigh on growth.”
While recent fiscal policies “will likely do the heavy lifting” of expanding domestic consumption, China’s central government may also provide additional funding for important infrastructure projects laid out in the 14th Five-Year Plan, as many were delayed due to Covid-19.
Support for new growth engines, such as the green transition and manufacturing modernisation, is likely to remain a priority.
Geopolitical tensions appear to have eased after Presidents Joe Biden and Xi Jinping met on the sidelines of the Asia-Pacific Economic Cooperation (APEC) summit in November 2023.
However, the upcoming Taiwan and US elections will likely be key touchpoints, says Liu. “Meanwhile, upside risks are likely to stem from a faster-than-expected improvement in confidence, likely led by more policy support or swifter stimulus implementation than expected.”
Japan ‘walking into technical recession’
From an economic perspective, Japan has been a lot slower than other major economies in its recovery from the pandemic, says Aadish Kumar, international economist at T. Rowe Price.
“A key difference between Japan and other major markets is that Japan is not facing a backdrop of tightening in financial conditions, owing to its slower post-pandemic recovery and weaker inflationary pressures.”
But Japan is walking into a technical recession, warns UOB Global Economics & Markets Research. Japan’s economy fell faster than estimated in 3Q2023, losing an annualised 2.9% on soft consumption and exports, despite a weakening yen. The contraction had previously been estimated at 2.1% and snapped two straight quarters of expansion in 1H2023.
The Bank of Japan (BoJ) has stressed the need to maintain ultra-low interest rates until it achieves its sustained and stable 2% inflation target, accompanied by wage hikes.
At its most recent meeting on Dec 18-19, 2023, the BoJ kept its short-term rate target at -0.1% and its 10-year government bond yield around 0%.
“The chance of trend inflation accelerating towards our price target is gradually heightening,” said BoJ governor Kazuo Ueda, “but we still need to scrutinise whether a positive wage-inflation cycle will fall in place.”
The BoJ will meet again on Jan 22-23, and the most optimistic economists believe a policy shift could happen then. The majority, however, believe April is a more likely time.
This is also the time when the BoJ will include the fiscal year 2026 in its forecasts, where it can signal rising confidence in higher inflation, says T. Rowe Price’s Kumar.
The most dovish central bank so far may soon be convinced that inflation figures are sustainable and wage growth is real, says OCBC Bank chief economist Selena Ling.
But the BoJ’s long-awaited exit from negative interest rates is not a silver bullet for Japan’s economy. “Notwithstanding policy normalisation, yield differentials with the US remain wide by any measure,” adds Ling. “Moreover, given Japan’s ageing population dynamic and reluctance to welcome more foreign talent intake, it would be implausible to see Japan swiftly return to its pole position as the apex economy reminiscent of the 1990s.”
OCBC’s GDP growth forecast for various economies
Japan’s largest labour union has set a total pay hike target of “5% or more” for the 2024 spring wage negotiations, higher than the 2023 target of “around 5%”.
The first round of results are expected in the latter half of March, and the outcome will determine the course of both fiscal and monetary policy, say HSBC economists Neumann and Jun Takazawa.
A slowdown in global growth may lead to Japanese firms spending more modestly, which could contribute to a more prudent BoJ stance, adds HSBC. “In this sense, it is also important to observe whether small- and medium-sized enterprises can cope and adapt to the changing environment, given that they employ a majority (roughly 70%) of the workforce.”
As Japan’s economy transitions to a “mildly inflationary state”, Fidelity International’s Quaife sees opportunities within Japanese equities.
“Japan’s households are starting to show a shifting mentality from saving to spending, and this will have broad and lasting effects. From a sector perspective, technology currently delivers the most attractive earning forecasts, followed by healthcare and communications services.”
The steep decline in the value of the yen has been a central narrative in Japan for more than a year and a primary influence on Japan’s strong equity market returns, says T. Rowe Price’s Kumar.
“Currently around multi-decade lows, the weak currency has been particularly supportive of Japan’s export-heavy TOPIX index, with large, multinational auto companies and manufacturers benefiting greatly from their increased competitiveness. Value-oriented companies have powered the market, significantly outperforming their growth-oriented counterparts.”
Here, DBS Bank investment strategist Joanne Goh highlights Japan’s semiconductor prowess. “There is strong will by the Japanese government to stake out a dominant position in the global chip marketplace.”
Japan holds “unrivalled, bestin-class competencies” in chip manufacturing, adds Goh. The Tokyo-listed Tokyo Electron boasts a near-100% market share for extreme ultraviolet lithography (EUVL) equipment, which is essential for advanced chipmaking.
Meanwhile, Japanese firms JEOL and NuFlare hold a 91% share of the global market for mask-making or templates for manufacturing semiconductors.
Toshiba took NuFlare private in March 2020, while shares in Tokyo Electron and JEOL soared 97.25% and 79.16% respectively throughout 2023.
India at a crossroads
Strong throughout the pandemic years, India approaches a crossroads this year. Portfolio inflows are rising, but foreign direct investment (FDI) inflows have fallen sharply, note HSBC economists Pranjul Bhandari and Aayushi Chaudhary.
“Pandemic-led FDI flows in sectors like computer services and drugs and pharmaceuticals have slowed, but investment intentions reveal meaningful interest in promising sectors like renewables, semiconductors and AI.”
India could see growth over its coming fiscal year “slow at the margin”, as sticky inflation exerts a drag, but interest rate cuts could come into view just when the country holds national elections in May, they add. “Because the momentum is so strong, we do not expect growth to slow sharply. Government capex could fall, but some of it may help create space for current expenditure.”
India is well-placed to benefit from evolving supply chains. With an increasing number of US and European companies accelerating “friend-shoring” and near-shoring, India is one of the more attractive manufacturing locations, says PineBridge Investments.
These dynamics helped justify the International Monetary Fund’s recent 0.2% upward adjustment to its India GDP projection to 6.3%.
2023 witnessed remarkable broad-based gains in the Indian equity market, says JP Morgan’s Batra, and there is “high visibility of growth” for multiple years ahead. “We see in the financial market a virtuous cycle of investor participation, deepening and broadening liquidity, rising fundamental coverage and capital issuance.”
In the lead-up to the national elections, any share price correction or dip in Indian equities should be used as an opportunity to buy, says Batra.
His overweight sectors and counters to watch are financials (ICICI Bank, Bank of Baroda, Bajaj Finance, HDFC Bank), auto (Bajaj Auto, Maruti, M&M, TVS Motor, Exide), real estate (DLF, Macrotech Developers), consumer staples (Nestle, Dabur, GCPL, Hindustan Unilever) and pharmaceuticals (Sun Pharma, Alkem, Abbott India).
India’s GDP growth will remain resilient into 2025, supported by solid investments and resilient private consumption expenditures, says OCBC’s senior Asean economist Lavanya Venkateswaran.
The Reserve Bank of India (RBI) raised its policy rates by 250 basis points (bps) in the current hiking cycle, which started in May 2022. The repo rate has remained unchanged at 6.5% since February 2023.
Venkateswaran expects a cumulative 75 bps in rate cuts this year starting in 2Q2024, coinciding with OCBC’s house view that the US Federal Reserve will start cutting rates then.
Photos: Bloomberg
