While the Year of the Dragon should bring some relief to the wobbly economic growth and topsy-turvy markets that marked the Year of the Rabbit, 2024 may amount to a “plodding pick-up”, says Frederic Neumann, HSBC’s chief Asia economist and co-head of the global research team in Asia.
The Year of the Dragon is likely to see trades remaining “hampered” by subdued consumer demand in key markets despite recent green shoots of growth. At the same time, cooling inflation should bring about extensive relief although rate cuts may arrive only at a measured pace, he adds.
That said, the relief will be felt all around with interest rates likely to have climbed close to their peak after a “relentless rise” last year.
“The Fed, certainly, appears set to turn, providing some relief as well to markets in Asia over the coming year — even if, as HSBC’s chief global economist Janet Henry notes in a recent report dated Dec 14, 2023, the US central bank may only deliver rate cuts from 2Q2024 onwards, and at a much slower pace than financial markets currently expect,” Neumann writes.
In Asia, most central banks will also be shifting into an “easing mode”, with India, Singapore and Indonesia likely to loosen their monetary reins even before the Fed moves.
Meanwhile, other economies such as Australia, Thailand and Malaysia may wait till 2025, or even longer, before cutting interest rates, predicts Neumann.
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“Overall, however, the easing cycle will be gradual and shallow, with interest rates in two years still mostly well above where they were on the eve of the pandemic,” he says.
Japan, however, may head in the opposite direction with robust wage growth and slowly-climbing inflation expectations possibly offering the central bank its best chance in years to embark on a gradual normalisation of its monetary policy.
The emphasis is on the word “gradual” with officials likely to be more concerned about overtightening than about moving too slowly, notes Neumann. All things considered, however, much of Asia should still see “respectable” growth in 2024.
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Singapore story
The worst seems to have passed for Singapore, says HSBC’s Asean economist Yun Liu, after the republic narrowly avoided a technical recession in 2Q2023 and saw a 1.4% q-o-q growth on a seasonally-adjusted basis in 3Q2023. For the most recent 4Q2023, the government’s advanced estimates put the growth rate at 2.8% y-o-y.
Liu adds that the country’s growth was broad-based and mostly evident in its key manufacturing sector, which was in the doldrums for over a year.
“While external demand remains sluggish, the manufacturing sector saw its first sequential growth in 2023, though the magnitude was still marginal. In particular, a few green shoots appeared in electronics production, which grew by double digits in October and November on average,” says Liu in her report on the nation’s 1Q2024 outlook.
“While the recovery in the global electronics cycle is still at a nascent stage, it provides hope for tech-heavy economies of a key growth driver for 2024. Yet, we caution on the magnitude of the rebound,” she adds.
The economist notes that at home, private consumption remained positive from a tight labour market, although the sector is beginning to show early signs of cooling from early retrenchments. Travel-related services were also driving growth, although Liu sees that the sector has room to grow further as a few sectors have yet to return to their pre-pandemic levels.
All in, Liu has kept her GDP growth forecast at 1.2% for 2023, which is in line with the advance estimates released by the Ministry of Trade and Industry on Jan 2.
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This year, the economist is anticipating 2.4% y-o-y growth, on the back of an ongoing recovery in travel and a modest turn in the tech-led global trade cycle.
Liu’s core inflation forecast of 4.1% for 2023 also came very close to the actual average of 4.2%. She notes that while disinflation continues to be the dominant theme with core inflation consistently cooling in the last few months from its peak of 5.5% y-o-y, October’s higher-than-expected core inflation is a reminder that it may be still some time before inflation will decelerate to the Monetary Authority of Singapore’s (MAS) comfort zone.
With upside risks from energy shocks and planned administrative hikes in 2024, Liu has upgraded her core inflation forecast to 3.1% from 2.9%.
On the MAS’s monetary policy stance, Liu sees that the central bank will start reversing its tightening cycle from imminent upside risks to inflation, despite its shift in focus from inflation to growth.
As such, Liu expects the central bank to reduce its Singapore dollar nominal effective exchange rate slope in April 2024 at the earliest.
“If the global electronics cycle sees a sharper-than-expected rebound [in 2024], Singapore will no doubt be one of the main and early beneficiaries,” says Liu.
“Meanwhile, it is still too early to call it a victory on the inflation front. If core inflation becomes stickier than expected, this may delay the timing of the MAS to loosen its monetary policy. Our base case is for that to occur in 2Q2024, but if inflation becomes more persistent, the timing could be pushed to 3Q3024,” she adds.
Asian equities to benefit in 2024, with China and India driving gains
Given the broadly improving macro-economic outlook, Asian equities will stand to benefit in 2024, say Herald van der Linde, HSBC’s head of equity strategy in Asia Pacific; Prerna Garg, associate, equity strategy; and Nishu Singla, associate. This is especially if the growth in China recovers, the analysts add.
The analysts prefer China H-shares over China A-shares and Japanese equities, going against consensus views. China H-shares refer to the companies listed on the Hong Kong Stock Exchange and are quoted and traded in Hong Kong dollars. China A-shares are shares in mainland Chinese-based companies and are listed on the Shanghai or Shenzhen stock exchange.
“Lower bond yields are especially supportive for China H-stocks which are particularly sensitive to falling rates. Conversely, this adds risk to Japanese equities, a market where most funds are now already well-exposed,” the analysts write.
For China H-shares, the analysts see two scenarios. The first, which is a rosier outlook, assumes EPS growth of 16% with valuations returning to their average five-year P/E of 12 times. In a more pessimistic outlook, the analysts have assumed no EPS growth with valuations falling back to their lows in October 2022. Should both scenarios have a 50% probability, the expected upside could be in their high teens.
The analysts are also going against the consensus as they indicate their preference for Taiwanese shares over Korean shares. While Korea stands out for its earnings growth with the consensus estimating the country’s EPS growth accelerating from 2% in FY2023 to 21% in FY2024, the analysts note that much of the growth is led by a recovery in the semiconductor memory sector.
“This skews the overall picture; in most markets, earnings growth is projected to slow gradually. In mainland China, for example, consensus forecasts earnings growth to fall from 18% in FY2023 to 15% in FY2024,” the analysts write.
“Across the region, we forecast an upside of 12% for FY2024 from current levels, with an upside of 20% for FTSE China, led by the Hong Kong-listed universe,” they add.
In other areas, the analysts are also looking for value in Indian large-caps and see opportunities in Indonesia and Thailand.
Indian equities provide an “exciting earnings growth” story with support from global and domestic factors.
“India has been one of Asia’s standout markets in recent years, with 2023 no different as the FTSE India rose 24% against the FTSE Asia ex-Japan, up 4.6% in US dollar terms. This is supported by improvements to the market’s breadth and depth, such as market liquidity doubling since the pandemic started, high primary market activity ([around] US$100 billion or $134.12 billion since 2020), and a sharp jump in domestic participation,” say the analysts.
“We believe all these improvements put India firmly on the path of continued outperformance into 2024,” they add.
In Indonesia, although equities remained under pressure last year from softer commodity prices, weak global demand and limited domestic catalysts, analysts continue to like the country’s medium-term structural growth prospects.
In the short term, the analysts are banking on an outperformance after Indonesia’s elections on Feb 14, citing its historical performance. In the past four elections, the country’s equities underperformed the region by 5% in the year before and outperformed by 11% in the year after.
On the macro front, things appear to be stable with HSBC’s India and Indonesia chief economist, Pranjul Bhandari, not expecting economics to be a major issue in the run-up to the election.
“After a weak 2023, credit growth seems to be picking up. There are also substantial foreign direct investments waiting on the sidelines, which could manifest once the elections are over,” say the analysts.
“Global factors are turning favourable. In the past cycles, the Indonesian equities outperformed after a peak in Fed rates, and we believe this factor could extend support in 2024 once the election-related uncertainties fade,” they add.
Consensus expects earnings growth of 25% in 2023, followed by another 8.5% in 2024. Excluding GoTo, the consensus expects earnings to grow by 10% in 2023 and 7% in 2024 with a large contribution coming from banks.
Meanwhile, in Singapore, the analysts are less buoyant on the country’s equities with key overhangs being a peak in the banks’ net interest margins, high leverage in the real estate sector, and caution around a recovery in the global electronics cycle.
Within the region, the analysts are “overweight” on mainland China, India, Indonesia and Thailand. They are “neutral” on Hong Kong and Taiwan; and “underweight” on Singapore, Japan, Malaysia and the Philippines. They have also downgraded Korea to “underweight” from “neutral”.
