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

In 2023, JPMorgan analysts expect Southeast Asian markets to experience “a sharp decline, followed by a rapid increase to highs (a bear market rally) and then another decline until the markets bottom out.”

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According to JPMorgan analysts, Southeast Asian markets will behave in a similar way to “bungee jumping” in 2023, falling before rising in the second half of the year.

Analysts led by Rajiv Batra wrote in a report that it is likely to be characterized by “a sharp decline, followed by a rapid rise to highs (a bear market rally) and then further declines until the markets bottom out.” They attributed it to the weakening of purchasing power, the decrease of savings and the increase in the cost of borrowing against the backdrop of monetary policy tightening.

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JPMorgan expects the MSCI ASEAN Index to “retest this year’s lows and potentially move further lower” in the first half of 2023, citing weak external demand, tightening financial conditions and a “fading” pace of reopening, among other factors. .

The MSCI ASEAN Index fell 22% from a high in February to a low of the year in October. The index later rose 10% on hopes for China’s reopening and the U.S. Federal Reserve’s turnaround.

Given the global recessionary conditions, China’s reopening momentum is expected to be modest.

The index measures the performance of large and mid-cap stocks across four emerging markets, one developed market and one frontier market. It has a total of 170 components in Singapore, Indonesia, Malaysia, Philippines, Thailand and Vietnam.

Trade-oriented economies

It is expected that Fed interest rates will reach 5% by May, and there will be a recession in the United States at the end of the year.

But “contrary to investor belief, the stock market did not fully appreciate until after the recession,” the report said.

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

An epidemic control worker outside a state quarantine facility in Beijing on December 7, 2022.

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In addition, China’s expected easing of Covid restrictions will not offset the downgrade in the forecast.

Thailand’s economy, for example, is expected to experience a “significant decline” in exports, private investment and manufacturing, with JPMorgan analysts cutting their 2023 gross domestic product growth forecast to 2.7% from 3.3%.

Singapore is also expected to face tougher macroeconomic conditions.

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“We expect the weakening of external demand to continue to slow down [Singapore’s] As the service sector provides some compensation, so does the manufacturing sector.”

JPMorgan said Singapore’s upcoming goods and services tax hike – from 7% to 8% – will also dampen demand and the outlook for the consumer sector.

China is reopening

China’s “reopening momentum” is also estimated to be modest given the global recessionary conditions.

Mainland China relaxed many of its strict Covid controls last week, with national authorities announcing a series of sweeping changes to the ease of travel within the country, allowing businesses to continue operating and home quarantine for Covid patients.

“Benefits from China’s reopening will be offset by a slowdown in developed markets,” JPMorgan analysts told CNBC, adding that Southeast Asian markets are highly exposed to exports and demand from developed market economies.

People are seen along the boardwalk overlooking the Marina Bay Sands Hotels and Resorts in Singapore on November 19, 2020.

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But China’s reopening to international travel, if it happens, would be a “positive catalyst” for Singapore’s economy. Chinese tourists accounted for about 20% of Singapore’s arrivals in 2019, and their return “could have a serious impact on them”. [Singapore’s] consumer and travel-related services sector.”

Nevertheless, JPMorgan estimates that upside will still be limited by the aforementioned global recessionary conditions and external demand challenges facing the country.

A full border opening from China would add a “potential upside” to Thailand’s tourism recovery, which could lead to inflation, according to the report.

“There’s an argument that China’s earlier-than-expected opening of borders is causing inflation,” JPMorgan said. However, while tourism can stimulate wage growth and consumption, it is not closely related to inflation in countries such as Thailand, where the nature of inflation is largely supply-driven, the analysts added.

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