China and Asia excluding Japan will drive global growth this year as the US likely enters a mild recession by 4Q2023 and Europe slows sharply due to tighter monetary policies, according to a 2H2023 outlook report by Standard Chartered (StanChart) wealth management’s chief investment office.
However, China’s recovery from the pandemic appears to be faltering, with industry and exports hurt by slowing global demand for goods, says Rajat Bhattacharya, senior investment strategist. “We expect China’s policymakers to provide targeted stimulus to sustain the domestic consumption recovery and revive private investment, job creation and the housing market for first-time buyers.”
Inflation will stay above-target in the US and Europe, reads StanChart’s May 26 report, while China will experience disinflation. “We expect inflation to soften further globally as supply bottlenecks ease. However, inflation in the US and Europe are likely to end the year well above the central banks’ 2% target as strong job markets sustain service-sector inflation. China’s inflation is likely to stay subdued.”
70% chance of US recession
Bhattacharya sees a more-than-70% probability of a US recession, most likely around the end of the year. “All leading indicators, except for the job market and consumption, are pointing to a recession over the next 12 months. We expect the 500 bps [basis points] of Fed policy tightening over the past year to impact growth with a lag by the end of the year, leading to a softening of the job market.”
The three markets’ central banks are expected to diverge. “We now expect the Fed to hold rates at a cycle high of 5.25% until 3Q2023 due to elevated inflation, before cutting 100 bps by 2Q2024 as a mild recession sets in. Meanwhile, the European Central Bank (ECB) is likely to hike by 50 bps to 3.75% by 3Q2023 and hold it there until 1Q2024. The People’s Bank of China (PBoC) is likely to ease policy further in 2H2023 to support the recovery.”
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The Fed is likely to start cutting rates in 4Q2023 once the unemployment rate rises past 4%, he adds, but any rate cut is likely to be modest, given the still above-target inflation.
The ECB, meanwhile, is likely to be constrained by still-elevated inflation and resilient growth, forcing it to hold the deposit rate at a cycle high of 3.75% until 1Q2024.
Bhattacharya expects more China stimulus to provide targeted incentives to lift consumer demand, entice first-time home buyers, revive private investment in strategic industries and boost job creation.
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The PBoC is also likely to ease credit to support growth. “External headwinds restraining China’s manufacturing and exports mean more support from Beijing to sustain domestic consumption. The May Golden Week holidays showed leisure travel and spending surpassed pre-pandemic levels, although per capita spending was relatively muted.”
Overweight Asia ex-Japan
StanChart remains “underweight” on global equities on a 12-month horizon, as analysts expect a recession in the US and growth slowdown in Europe to weigh on corporate earnings and equity market returns.
Meanwhile, StanChart’s analysts are upgrading Japanese equities to “overweight”. “Besides cheap valuation, Japan’s economic data, such as GDP growth and private consumption, has been beating expectations.”
Corporate governance has been improving, says head of equity strategy Daniel Lam. “Companies have been increasing their dialogue with investors, while share buyback reached a record high of US$71 billion [$95 billion] for the financial year ended March.”
Lam remains “overweight” on Asia ex-Japan equities, as he believes the Chinese government is likely to deliver targeted stimulus to support growth. “Chinese companies are expected to deliver stronger earnings compared to other regions.
However, China’s economic surprises are off their peak after the pandemic reopening, so we downgrade China to ‘neutral’.”
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Meanwhile, Lam is “neutral” on India, where relative valuation continues to adjust down closer to the long-term average.
Lam is also “neutral” on Euro area equities, where the significant valuation discount is pricing in vulnerabilities to growth. “We are ‘underweight’ UK equities, where we see the weakest earnings growth this year offsetting its low valuation.”
Finally, Lam has downgraded US equities to “underweight” on the margin. “Valuation remains elevated and we believe earnings are likely to suffer once the US enters a recession. Risks to our view [include] stronger-than-expected US economy, stronger-than-expected earnings growth in the US and globally, weaker-than-expected growth and earnings in China and Japan.”
‘Buy’ consumption recovery in China
Across sectors, senior investment strategist Yap Fook Hien sees value in two China sectors.
Communication services are dominated by media and entertainment companies that Yap believes will benefit from greater consumer spending, a recovery in advertising and policy support for Internet platforms’ development. Earnings revision in the sector has rebounded strongly, he adds.
Yap also sees consumer discretionary as a beneficiary of the ongoing reopening and policymakers’ priority in boosting domestic consumption. “Consumer activities should recover through the year as household incomes rise further and excess savings are released gradually amid a recovering economy.”
On the other hand, Yap is “underweight” on real estate as he expects it to lag a rebound in China equities. “Residential properties appear overpriced in Tier 1 and Tier 2 cities and overbuilt in lower-tier cities. We downgrade technology to ‘neutral’ as investors fear the negative impact of US export controls on the sector. Industrials is also downgraded to ‘neutral’ as it could also be impacted by advanced technology restrictions from the US.”
Meanwhile, Yap is positive on healthcare in both the US and the UK. “Healthcare [in the US] provides defensive exposure with reasonable valuation. New oncology and obesity products are expected to support growth, while AI could accelerate drug development and reduce costs.”
In the UK, healthcare equities replaced utilities as Yap’s defensive pick. “Healthcare offers attractive growth for its valuation, with an earnings profile currently above the market.”
