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Opportunities and Challenges in the Asian Investment Market in 2023

Opportunities and Challenges in the Asian Investment Market in 2023

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  • Post last modified:February 17, 2023


Despite a dismal year for investment market returns in 2022, Asian equities have performed well at the beginning of this Lunar New Year. However, the market is expected to face headwinds from economic conditions, geopolitical tensions, and corporate earnings performance, leading to potential volatility. Among the many challenges, Asia remains one of the markets with investment potential.

U.S. Dollar Decline Supports the Asian Market

Asian stocks have underperformed compared with regions for two consecutive years, leading many investors to hold future underperformance. Following a year of aggressive monetary policy tightening, many are concerned about the deteriorating economic conditions in the U.S., which has cast a shadow over Asia’s export-oriented economies.

However, assuming the U.S. and Europe will experience mild recessions this year, Asia will be comparatively safe, benefiting from China’s economic reopening and policy shift. The U.S. Federal Reserve may pause its rate-hiking cycle at some point this year, and as the interest rate differential with other markets narrows, the long-standing advantage of the U.S. dollar could begin to shift.

This should be good news for emerging markets, including Asia, which will attract global funds to invest in markets other than the United States. Asia is currently one of the regions that have been under-allocated in investment portfolios of many institutions and high-net-worth individuals, but now the Asian market is expected to benefit first as the U.S. dollar continues to weaken.

China’s Stock Market to Strengthen This Year

Mainland China can potentially be the main contributor to the Asian market this year. Due to the release of Covid-19 control policies and the government’s support of technology companies and real estate developers, the Chinese stock market has a lot of room for a valuation adjustment. In addition to looking for a reasonable valuation, investors can take a balanced investment approach towards mainland Chinese stocks (A-shares) and offshore stocks (including H-shares listed in Hong Kong and ADR listed in the U.S.).

A-shares are most sensitive to policy issues among all types of Chinese stocks, with high-weight industries such as real estate facing lingering risks. As for ADR stocks, policy uncertainty and the US-China geopolitical tension over the past few years have severely affected the large offshore component stocks, leading fund managers and high-net-worth investors to adopt relatively conservative positions. But the US-China tension has a hope to ease this year, and the U.S.’s audit inspections over ADR stocks have recently obtained favorable results, significantly reducing the risk of ADR stocks for the next few years.

In Mainland China, the relatively favored industries in 2023 may include communication services and non-essential consumption, which may benefit from increasing supportive policies and lifting mobile restrictions. Communication services also include mobile game developers, whose profit prospects may surprise with the resumption of new online game approvals. As of February 2023, Tencent(0700.HK)’s stock price has nearly doubled from its low.

▲Tencent's stock price has nearly doubled from its low.
▲Tencent’s stock price has nearly doubled from its low.


At the same time, as the economy recovers from the pandemic, non-essential consumption industries such as tourism, electric vehicles, and online retail are expected to rebound significantly.

The Indian market can help with hedging risks

India has a natural hedge effect on the risks in the mainland Chinese market. Although the Indian stock market’s valuation is not cheap, with its favorable population structure and sustained infrastructure development, coupled with India’s high-quality companies that can flourish with its economic growth, India provides attractive long-term structural growth.

Overall, future risks in 2023 may include a resurgence of the pandemic, geopolitical risks, and the long-term escalation of the Russia-Ukraine conflict, which may intensify and stimulate demand for the U.S. dollar as a hedge. Given the current market background, it may be more appropriate to consider expanding defensive allocation beyond the U.S. dollar and assets to include more Asian stocks, gold, and high-quality bonds. And don’t forget the Japanese yen, which is always considered a safe haven during volatility due to Japan’s low inflation, large current account surplus, and stable economy.