The Year of the Rabbit heralded China's reopening, structural growth stories and changing attitudes towards sustainabiity.
While we didn't see a repeat of the massive public market turbulence of 2022, the past 12 months showed a mix of continuing topics and sudden developments that captured the attention of institutional investors.
A struggling Chinese economy against a resurgent India and Japan, and alluring prospects of fixed income and private credit were some of the key themes that emerged during the year.
As the Year of the Rabbit draws to a close, AsianInvestor presents the 10 leading investment themes that dominated the headlines.
CASH WAS KING
Higher interest rates made the prospect of simply holding cash or bank deposits quite attractive in the Year of the Rabbit.
Investors could get 5% yield on cash deposits in the US and the UK and between 3% to 4% in Europe and markets such as Hong Kong. As such, cash increased its role in portfolio management.
That made life difficult for investment managers, who nevertheless pointed that while cash is king in the short term, investors should be looking at diversifying their assets for the long term.
HELLO INDIA, GOODBYE CHINA
This was the year that investors started to favour India over China in their investments.
The South Asian nation turned into a favoured destination for foreign institutional investors looking to capitalise on the country’s need for infrastructure and renewable energies.
India is also seen as one of the beneficiaries of supply-chain diversification as companies seek to reduce their reliance on China as the sole manufacturing base.
India also reportedly surpassed China as the world's most populous country in the Year of the Rabbit.
In contrast, despite repeated attempts to reignite the Chinese economy after the COVID-19 pandemic, the Year of the Rabbit became one that investors will quickly want to forget when it comes to Chinese growth.
While there were several policy adjustments as well as increasing talks with overseas financial leaders, these have yet to show a significant impact on the economy and financial markets.
FEDERAL RESERVE HIKES RATES FURTHER
After raising interest rates, the Year of the Rabbit became a guessing game of when the US Federal Reserve (the Fed) would change direction start cutting interest rates.
At the start of the year, many asset managers were betting on rate cuts by December, if not earlier.
Yet underlying data points showed a US economy in relatively good shape and inflation still a potential danger, so the Fed raised rates four times between February and July 2023.
Now, once again, optimism is rising the Fed has finally hit 'peak rates' and that it will start to cut rates by mid-2024.
The next 12 months will tell us if that optimism is justified.
HONG KONG REOPENING ENTHUSIASM FIZZLED OUT
With Singapore having a head start in shaking off COVID-19 restrictions, Hong Kong’s government made a heavy push to promote the city as a tourism destination and a preferred wealth hub when its own restrictions were dropped.
But a sluggish Chinese economy, and lacklustre capital markets, enthusiasm about Hong Kong re-opening fizzled out quickly.
Despite Hong Kong's concerted attempts to woo Middle East and other investors, it's reasonable to say Hong Kong still has a long way to go to regain its mojo.
PRIVATE CREDIT CRAVINGS INTENSIFIED
With high interest rates, asset owners increasingly turned to fixed income for income and yield. While there was interest in bonds, there was also intensifying interest in private credit. In fact, early in the year concerns started to grow about valuations in private markets after the 2022 public markets turmoil.
The global private credit market is now estimated at $1.5 trillion, up from about $440 billion a decade ago, according to alternatives data provider Preqin.
That's primarily the result of banks globally retreating from lending after the global financial crisis, paving the way for non-bank entities to step in and fill the gap.
Concerns about a bubble continue to simmer even as several asset owners continue to pile into this asset class.
ESG BECAME A (SORT OF) BAD WORD
The Year of the Rabbit saw continued scepticism and pushback against the idea of t of incorporating environment, social and governance (ESG) factors amid fears of greenwashing.
While some factors seem inevitable to address as – almost – everyone recognises climate change, there continues to be a high degree of wariness around the ESG label as regulators in several markets crack down on greenwashing and exaggerated clean and green claims by companies.
At least one asset owner executive told AsianInvestor that he no longer likes or uses the term 'ESG'.
Still there was some progress as data points and reporting requirements are becoming more stringent so ESG is here to stay, albeit in the guise of decarbonisation and sustainability.
JAPAN TURNED TRENDY
Japan’s benchmark Nikkei 225 index started the Year of the Rabbit off so strong that some were worried about a minor bubble in an economy still scarred and limping back from its 'lost decade.'
As of February 8, the Nikkei 225 index had gained 36.3% from a year earlier.
Experts attribute several reasons for the stock market surge: new corporate governance rules by the Tokyo Stock Exchange, improving consumption trends and appealing as a diversifier away from China amid rising geopolitical tensions.
Even veteran investor Warren Buffett said he wanted to buy Japanese stocks.
The Year of the Dragon could see that optimistic trend continue.
INDONESIA POPPED UP ON INVESTMENT RADARS
Institutional investors started to take greater notice of Indonesia's investment potential in the Year of the Rabbit.
With noteworthy initial public offerings (IPOs) and playing home to several of Asia's unicorns (startups with estimated valuation of more than $1 billon), the Southeast Asian nation picqued the interest of several large institutional investors.
Sovereign wealth fund Indonesia Investment Authority (INA) also continued to co-invest with global pension funds and other wealth funds in local infrastructure and the green energy ecosystem.
The presidential election early in the Year of the Dragon (February 14) will determine whether the country's development streak -- and institutional interest -- continues.
EMERGING ASIA EX CHINA'S APPEAL GREW
Asian emerging markets outside China experienced foreign investment uptick during the past 12 months.
With uncertainly haunting China's economic prospects, many global investors, for now, have redirected their attention to other markets in the region – and they like what they see.
The region holds immense appeal with a variety of economies in different stages of growth and development.
US DOLLAR DOMINATION CONTINUED
The US dollar continued to gain strength in the Year of the Rabbit, largely due to the hawkish policy maintained by the Fed in response to soaring inflation.
While there were expectations from everything to the Mexican peso to the Korean won and the Thai baht pocketing gains, the Year of the Rabbit saw continued US dollar strength.
While US dollar strength was challenging for Asian currencies, it also meant that assets denominated in these currencies became more attractive for US dollar investors.
Asian asset owners taking home profits from overseas markets in alternatives investments for example, also benefitted as they saw an increased value in returns in local currency.