The economic and market landscape in 2023 may look slightly different from how it did in 2022, but investors should continue to anticipate some turbulent and occasionally unforgiving times.
In Asia, hopes are that inflation has peaked at last, although a descent from recent highs might prove challenging. Price disinflation is likely to translate into lower corporate revenue, resulting in possible downside for equities, according to Saira Malik, chief investment officer at Nuveen.
The asset manager, owned by and investing on behalf of the Teachers Insurance and Annuity Association of America and third-party capital, prefers quality and dividend growth stocks that reflect that scenario.
“Investors will celebrate the easing of inflation and the corresponding lessening of pressure on central banks to tighten policy," Malik told AsianInvestor. "But in the wake of declining inflation, we’ll find a global economy still nursing a hangover from the post-pandemic reopening binge, hampered further by higher borrowing costs and diminished savings.”
She said countries such as China and Japan remain sensitive to export demand and that they have also seen their domestic economies struggle.
Also read: 2023 outlook for Japan’s equity market
The market in 2023 faces fewer headwinds than a year ago, according to Lorraine Tan, director of equity research for Asia at Morningstar.
The investment research firm expects Federal Reserve interest rate easing to be possible in second half of 2023 after a peak and as markets become less expensive.
“We may still see earnings weakness for US companies and Asian exporters, given softer growth in the US, but we think the market will start looking ahead to a more benign interest rate cycle by mid-2023,” Tan told AsianInvestor.
Morningstar expects China to continue its recent outperformance compared the rest of Asia. Valuation-wise, the discount is not as deep as what was seen in November, but certain sectors, such as tech and consumer discretionary, still have some room to rise, Tan said.
“While the Covid reopening doesn’t move our valuations much, as we already assumed a gradual opening in China in 2023, especially from mid-2023, we have not factored in additional government support to certain sectors," she said. "But the main positive is that the recent events should provide a floor to earnings outlooks for China companies and reduces risks.”
Morningstar continues to advocate a mix of value and growth stocks, since there are still quality names trading at discounts to fair-value estimates. Morningstar also believes China's real estate sector has bottomed out, but that the recovery will be “slow and bumpy”, Tan said.
Amid expectations that Asia’s economic growth will get back on track next year, asset manager Invesco believes that the region's unique economic dynamics and the attractive valuations of Asia ex-Japan equities can provide global investors with good opportunities for diversification in 2023.
“India is fast-growing and contributes meaningfully towards Asian and global expansion," Mike Shiao, chief investment officer Asia ex-Japan at Invesco, told AsianInvestor. "The Taiwan and [South] Korean markets have been impacted by softening global tech demand. The equity valuations in these two economies have lowered to comfortable levels and we hope to see a re-rating of the sector next year.”
Moderating inflation should provide some tailwinds for stocks in 2023, according to Nuveen’s Malik. In particular, she expects to favour dividend growers, a segment in which relatively higher income can help to offset price return volatility.
“Across market sectors, we like healthcare as a relatively stable area and see opportunities in [real estate investment trusts], which offer a combination of solid fundamentals and attractive valuations. We also think the materials sector should benefit from easing inflation and energy should hold up well,” Malik said.
Malik added that Nuveen is less favourable towards higher-growth areas, including technology and communications services, which she said are likely to struggle amid a “higher for longer” interest rate environment.