Daily Management Review

JPMorgan Says Markets Of Southeast Asia Markets Will Undergo A "Bungee Jump" In 2023


JPMorgan Says Markets Of Southeast Asia Markets Will Undergo A "Bungee Jump" In 2023
According to JPMorgan analysts, Southeast Asia's markets will behave similarly to a "bungee jump" in 2023, plummeting before surging in the second half of the year.
This is likely to be characterized by a "sharp fall followed by a rapid increase in altitude (bear market rally) followed by another decline until markets eventually come to rest at rock-bottom," according to a report by analysts led by Rajiv Batra. They attributed this to weakened purchasing power as a result of monetary policy tightening, lower savings, and higher borrowing costs.
The MSCI ASEAN Index, according to JPMorgan, will "re-test this year's lows and potentially move even lower" in the first half of 2023, weighed down by weaker external demand, tightening financial conditions, and a "fading" reopening boost, among other factors.
The MSCI ASEAN Index fell 22% from its peak in February to its low for the year in October. Following that, the index rose 10%, buoyed by hopes of China reopening and a U.S. Federal Reserve pivot.
The index tracks the performance of large and mid-cap stocks in four emerging markets, one developed market, and one frontier market. It is made up of 170 constituents from Singapore, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.
Fed interest rates are expected to reach 5% by May, and the United States is expected to enter a recession by the end of the year.
However, "contrary to investor expectations, the equity market has failed to fully price in a recession until it occurs," according to the report.
Trade-oriented economies such as Singapore, Thailand, Vietnam, and Malaysia will be particularly impacted by the coming slowdown in global growth and weaker demand for durable consumer goods.
Furthermore, China's anticipated relaxation of Covid restrictions is unlikely to offset the forecast drop.
The Thai economy, for example, is expected to suffer from a "significant decline" in exports, private investments, and manufacturing, with JPMorgan analysts cutting their GDP growth forecast for 2023 from 3.3% to 2.7%.
Singapore's macroeconomic conditions are also expected to deteriorate.
“We expect that the weakening in external demand will continue to slow [Singapore’s] goods producing sector even as the services sector provides some offset.”
JPMorgan predicted that Singapore's upcoming goods and services tax increase — from 7% to 8% — would dampen demand and the consumer sector's outlook.
Given global recessionary conditions, China's "reopening impulse" is also expected to be modest.
Mainland Many of China's strict Covid controls have been relaxed in the last week, with national authorities announcing a slew of sweeping changes such as easier domestic travel, keeping businesses open, and allowing Covid patients to quarantine at home.
“The benefits from China’s reopening will be offset by recessions in the developed markets,” JPMorgan analysts told CNBC, adding that Southeast Asian markets have high exposure to exports and demand from the economies of developed markets.
However, reopening China to international travel would be a "positive catalyst" for Singapore's economy. In 2019, Chinese tourists accounted for roughly 20% of Singapore's tourist arrivals, and their return could have "knock-on effects on [Singapore's] consumption and travel-related services sector."
Nonetheless, JPMorgan believes that the country's recovery will be hampered by the aforementioned global recessionary conditions and external demand challenges.
According to the report, a full border reopening from China would also add "potential upside" for Thailand's tourism recovery, which could be inflationary.
“There is an argument that China’s earlier-than-expected border reopening is inflationary,” JPMorgan said. Nevertheless, while tourism may stimulate wage gains and consumption, it is not tightly correlated with inflation in countries like Thailand, where the nature of inflation is primarily supply-driven, the analysts added.