The strong dollar and global rate hikes led by the US Federal Reserve have triggered a few rounds of knee-jerk outflows from Asian markets this year, and might continue to rack nerves in 2023, but despite this we see the region showing greater resilience than in previous tightening cycles.
With improving fiscal positions and relatively mild inflation, Asian economies today have greater leeway to adjust their pace of tightening based on domestic needs, even as they come under pressure to follow the Fed’s direction. Moreover, China may continue down its own path of easing, Japan has been sticking to yield curve control (YCC), and India can stay nimble on the back of a robust domestic economy.
China divergence
We believe China will buck a global trend of rate hikes and remain in a relative easing stance, providing a tailwind for its economy in the coming year. But instead of broad-based rate cuts, we think easing is more likely to come in targeted modes, such as geographically applied mortgage-rate reductions.
Despite dollar strength, the renminbi should remain relatively more stable when measured against the broader China Foreign Exchange Trade System (CFETS) basket of currencies. And we think China government bonds could remain one of the most stable types of sovereign securities, potentially offering diversification benefits for global investors.
Nevertheless, the Chinese economy faces a number of near-term challenges including weak income growth, relatively high youth unemployment, and a potential softening of exports. We expect the country’s gradual reopening to ensue in the coming months and provide impetus for a moderate recovery.
Japan sticks to its guns
In Japan, mild inflation has allowed the central bank to maintain a loose monetary stance through YCC, with price increases among the smallest in the world. This, however, has come at the cost of a volatile yen, and inflation has crept up above 3 per cent in October. The Bank of Japan may keep employing YCC for a loose setting next year, as long as the weak yen does not significantly push up import costs.
A favourable trend in improving returns on equity has emerged among Japanese companies and we believe it will continue next year. In addition, Japanese equities can offer an attractive diversifier for global investors due to their large cash piles, which help minimise debt-servicing burden.
Regional resilience
Elsewhere in Asia, we hold constructive views on countries like India and Indonesia, where robust growth outlooks help offset concerns about inflation or the strong dollar. India benefits from strong domestic consumption, rising investment, healthier balance sheets of banks, and growing high-tech exports. Although it faces considerable inflationary pressure as a commodity importer, we believe India is on track to deliver decent real GDP growth next year.
Indonesia’s current account surplus has been driven by strong commodity exports, mainly in coal and crude palm oil. Notably, the country has managed to consolidate fiscal deficits this year and should continue to do so in 2023. We are positive about Indonesia’s growth prospects, although its large trade surplus may gradually shrink as commodity prices stall. With more modest inflationary pressure, the country initially lagged most Asian peers in this rate-hike cycle, but we have seen its central bank playing catch-up on monetary normalisation.
Compared to previous tightening cycles, many Asian countries have reduced their reliance on external funding, thanks to the growth of domestic capital markets. This should help limit the impact of capital outflows induced by the Fed’s aggressive tightening. With lessons learned from history, most countries in the region have today accumulated much stronger foreign exchange reserves than they had in the 2008-09 Global Financial Crisis or the 1997-98 Asian Financial Crisis.
For long-term investors, the occasional outflows from both equity and fixed income markets in Asia this year have depressed valuations and made securities look more attractive in parts of the market. With recession risks looming in much of the developed West, global investors may look East in 2023 for both diversification benefits as well as growth potential.
Outlook materials
- Download the PDF of the 2023 Outlook to understand the latest thoughts of our investment teams as they position themselves for the polycrisis (and download the Asia Outlook here).
- Dig deeper into the data that’s guiding their thinking: this deck provides context in charts.
- View the investment implications of the 2023 Outlook across different asset classes in this one-page matrix.
Important Information
This document is for Investment Professionals only and should not be relied on by private investors.
This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.
Past performance is not a reliable indicator of future results.
This document may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German Institutional clients issued by FIL (Luxembourg) S.A., 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg.
In Hong Kong, this document is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, Independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road., Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C Customer Service Number: 0800-00-9911#2 .
Brunei, Indonesia, Malaysia, Philippines and Thailand: For information purposes only. Neither FIL Limited nor any member within the Fidelity Group is licensed to carry out fund management activities in Brunei, Indonesia, Malaysia, Thailand and Philippines.
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.
ED22 - 201