Southeast Asian markets are poised for a ‘bungee jump’, says JPMorgan

Southeast Asian markets will move in a similar “bungee jump” fashion in 2023, plunging before surging in the second half, JPMorgan analysts say.

This will likely be characterized by a “sharp fall followed by a rapid rise in altitude (bear market resumption) followed by another drop until markets eventually stall at the bottom,” wrote analysts led by Rajiv Batra in a report. They attributed this to weakening purchasing power in light of tighter monetary policy, lower savings and higher cost of borrowing.

JPMorgan expects the MSCI ASEAN index to “retest this year’s lows and potentially dip even lower” in the first half of 2023, weighed down by weaker external demand, tighter financial conditions and a “weak” revival of the reopening, among other factors.

The MSCI ASEAN Index fell 22% from February’s high to October’s year low. The index then rebounded 10%, buoyed by China’s reopening hopes and a pivot from the US Federal Reserve.

The index measures the performance of large and mid cap stocks in four emerging markets, one developed market and one frontier market. In total, he includes 170 constituents in Singapore, Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

Fed interest rates should reach 5% by May, and a US recession is expected at the end of the year.

But “contrary to investor belief, the stock market did not fully price in a recession until it happened,” the report said.

Trade-oriented economies such as Singapore, Thailand, Vietnam and Malaysia will be particularly affected by slower global growth ahead and lower demand for consumer durables.

On top of that, China’s planned easing of Covid restrictions is unlikely to offset the drop in forecasts.

Thailand’s economy, for example, is expected to be hit by a “significant decline” in exports, private investment and manufacturing, with JPMorgan analysts lowering their 2023 gross domestic product growth forecast from 3.3% to 2 .7%.

Singapore is also expected to face tougher macroeconomic conditions.

“We expect the weakening in external demand to continue to slow [Singapore’s] goods-producing sector, although the service sector provides some compensation. »

Singapore’s upcoming Goods and Services Tax hike – from 7% to 8% – would also dampen demand and the outlook for the consumer sector, JPMorgan said.

Mainland China has relaxed many of its strict Covid controls last week as national authorities announced a series of sweeping changes such as making it easier to travel within the country, keeping businesses operating and quarantining Covid patients at home.

“The benefits of reopening China will be offset by recessions in developed markets,” JPMorgan analysts told CNBC, adding that Southeast Asian markets are heavily exposed to exports and demand from developed market economies.

But China’s reopening to international travel, if it happens, would be a “positive catalyst” for Singapore’s economy. Chinese tourists accounted for around 20% of tourist arrivals in Singapore in 2019, the return of which could also “create repercussions on [Singapore’s] consumer and travel-related services sector.

Still, JPMorgan believes the upside will likely still be constrained by the aforementioned global recessionary conditions and external demand challenges facing the country.

A full reopening of borders from China would also add “upside potential” for Thailand’s tourism recovery, and that could be inflationary, the report said.

“There is an argument that reopening China’s borders earlier than expected is inflationary,” JPMorgan said. Nevertheless, although tourism can boost wage gains and consumption, it is not highly correlated with inflation in countries like Thailand, where the nature of inflation is mainly supply driven, added the analysts.