External headwinds will test Asia’s domestic resilience in the latter half of the year, as higher oil prices trigger inflation risks and force economies here to tighten monetary policies, says Deutsche Bank in its 2H2022 outlook on June 23.
The external demand slowdown, coupled with softer growth in the developed markets, will weigh on Asia’s growth, says Stefanie Holtze-Jen, chief investment officer for Asia Pacific at Deutsche Bank.
That said, China should see more tangible recovery with more reopening and more stimulus measures, she adds.
A speedy recovery in consumption may not happen soon, due to higher urban unemployment rates and slower household income growth.
Meanwhile, the fiscal support measures — including tax repayment and consumption subsidies — may bolster pent-up demand, notes Deutsche Bank.
China’s retail sales for May dropped by 6.7% y-o-y — not as steep as the preceding month’s 11.1% y-o-y plunge.
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To put that into context, April was the most severe decline since early 2020, when the Covid-19 pandemic had just started.
Among all items, auto sales declined sharply by 43% y-o-y in April due to the lockdown measures in different cities, particularly in Shanghai. With tax subsidies for car purchases, especially for electric vehicles, Deutsche Bank thinks auto sales could likely rebound quite visibly from June.
The property sector could also stabilise in 2H2022 with supportive policies. China’s property sales declined substantially in recent months. In April, property sales fell by 48.6%, the most severe decline since the 2008 global financial crisis.
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However, many supportive policies have been implemented recently, says Holtze-Jen.
Mortgage rates were lowered “quite substantially” from more than 5% to now nearly 4% in many cities.
In addition, more than 100 Chinese cities announced the loosening of property purchase restrictions.
While the macro environment was not ideal for property markets with tougher labour market conditions, Deutsche Bank analysts expect some housing demand could be released with this policy support.
We believe that China’s growth recovery in 2H2022 this year will be strongly supported by reopening and stimulus.
“We think the worst is over in regards to property market tightening. Property transactions could gradually stabilise and improve in coming quarters, in our view. We remain positive on China’s property market in the long term. We think continuing urbanisation and rising household incomes could drive structural housing demand,” write the Deutsche Bank analysts.
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The bank is also maintaining its above-consensus China GDP forecast of 4.5%. “After the severe lockdown measures were implemented in Shanghai in April, the consensus forecast for China’s 2022 GDP declined quite substantially from above 5% to now around 4%... We believe that China’s growth recovery in 2H2022 this year will be strongly supported by reopening and stimulus.”
India’s ‘robust’ economy
As the world’s second largest net importer of crude oil, India meets over 80% of its requirements via foreign supplies. Hence, higher oil prices will have a negative impact on trade terms and balance of payments, says Mayank Khemka, Deutsche Bank’s chief investment officer for India.
Despite inflation-related challenges, India regained the title of fastest growing major economy in FY2022 ended March, clocking GDP growth of 8.7% y-o-y. At its policy meeting on June 8, the Reserve Bank of India (RBI) announced that India’s FY2023 GDP growth is forecast to be 7.2%, while FY2023 CPI inflation was revised up recently to average 6.7% y-o-y, based on oil at US$105 ($147).
But with the economy running hot in a supply-constrained world, the risks to inflation still threaten any upside. India’s inflation is higher than RBI’s 2% to 6% tolerance band, and Mayank expects RBI to remain in the rate-hiking mode.
Earnings growth for Indian equities is still supportive, says Mayank, as foreign investor selling is being absorbed by domestics.
Foreign investors have also continued their persistent selling of Indian equities: The May sales total was the second highest ever at US$5.4 billion, after the March 2020 capitulation. The year-to-date number in excess of US$22 billion is already the highest in any year.
While operating margins have taken a hit — both in manufacturing, as raw material costs escalate, and in services due to wage inflation and operational costs — sales growth compensated for it.
Given this dynamic and structural story around reforms, formalisation of the economy and digitalisation trends, Indian equities have outperformed peers globally, both in the bull market since March 2020, as well as the bear market year-to-date.
The outperformance has been supported by robust fundamentals, adds Mayank of earnings reported in 1Q2022. “While operating margins have taken a hit — both in manufacturing, as raw material costs escalate, and in services due to wage inflation and operational costs — sales growth compensated for it.”
Mayank also points to how the Nifty 50 (which refers to the benchmark used by the Indian stock market index) sales grew 25% y-o-y in the March quarter, boosting profits as Nifty 50 profit after tax (PAT) grew 21% y-o-y. Nifty earnings per share (EPS) for FY2023 currently stands at INR888 ($15.70), implying FY2023 earnings growth of 17% y-o-y, valuing the market at 18.3x price to earnings.
