I guess we're normally pretty optimistic heading into a new year. Idealistic resolutions of self-improvement are yet to be broken. Most of us have had a bit of family time or, dare I say it, time off. We're feeling good.
Asian equities are certainly looking up, and the forecasts for the region share our personal optimism. Asian markets are almost all higher in 2023, with the S&P Pan Asia Broad Market Index at levels last seen in August, and the 30-stock Asia Dow Index trading recovered to where it was last June, a seven-month high-water mark. Will that bullishness last longer than our pledges to get into better shape?!
Now, besides my all-too-long career as a reporter, I decided to better myself a few years ago and got certified as a personal trainer. I fit training sessions for clients around my writing, or the other way around. In any case, I love the blend of something physical like training with something cerebral like writing.
So, with my personal trainer hat on, I would encourage you to keep up with those pledges of self-improvement. You can do it! Set small steps that you can chalk off regularly, and even better make procedural "self-promises" such as "I'll exercise 15 minutes a day," rather than long-term resolutions that "I'll lose 20 lbs." If you promise to exercise every day, you "win" every time you accomplish that procedural goal. But with the long-term 20 lbs resolution, it's easy to feel like you've failed every day until you get there.
Will the Asian markets sustain their strength? There are specific steps that suggest they may. Procedures are under way that look set to pay off later this year. Equity markets are rallying in anticipation of that potential.
China is opening up, causing an extremely painful Covid outbreak - local reports indicate it may have peaked, but the travel period surrounding the Lunar New Year on January 24 suggests the virus will have a resurgence. But opening up is certainly a long-run positive not only for the Chinese economy but also China's neighbors, travel destinations and Asian trading partners. Other Asian nations have already been ticking along at a solid pace of growth and activity even while robbed of China's output.
Another step should come with the U.S. inflation figures that are due to come out on Thursday. If the numbers continue to show a decline in the inflation rate, it will put wind in the sails of Asian currencies. U.S. inflation is down from a peak of 9.2% to 7.1% as of November. So, strangely, Asian investors find themselves scrutinizing U.S. price increases more than the local levels of inflation, which are generally far lower.
Stronger Asian currencies are not always a good thing for companies and equities, since it makes Asia's exports more expensive. As I outlined on Friday, the U.S. dollar has been shockingly strong for the last 18 months, but the reign of King Dollar is likely at an end. A high dollar drives many costs in Asia higher, particularly for components, imports and items like fuel that are based off U.S. dollar pricing.
Above all, stronger Asian currencies will take the pressure off central banks in Asia. That's particularly true for the central banks that aren't raising rates such as in China and Japan, Asia's largest economies. And stronger Asian currencies make holding Asian assets more attractive.
Asia has experienced arguably the greatest disruption due to Covid-19. It's a region where there's a lot of cross-border travel, under normal circumstances, and that just hasn't been possible. The closure of borders also robbed Asian heads of state from their ability to conduct in-person foreign policy and trade missions.
Those activities are back with a vengeance. The Japanese Prime Minister Fumio Kishida, who took office right in the middle of Asia's outbreak in October 2021, is on a trip to the United States, Canada, the United Kingdom, France and Italy as part of the responsibilities after Japan took over the presidency of the G7 group of developed economies for this year. He said before he left that he plans to speak "candidly" with his counterparts, "and have frank discussions that further deepen our personal relationships of trust."
Kishida will make his first trip to Washington as Japanese leader, holding a Japan-U.S. summit with President Biden that's scheduled for Friday. Defense is top of his agenda, with Japan expanding its defense budget and capabilities. The two nations represent two corners of "the Quad" group of Asia Pacific democracies that also includes India and Australia.
Kishida is currently in London where is scheduled today to sit down with British Prime Minister Rishi Sunak. They're due to sign a defense agreement allowing both nations to deploy forces on each other's soil. It's the latest cooperative defense effort between the two nations, coming one month after both agreed to work with each other and Italy on a new program to develop next-gen fighter jets.
How wide is the Pacific? Britain, normally known for being stationed solidly in the Atlantic, appears to want to expand that definition. Sunak, the first British leader of Indian ancestry, says the reciprocal-access deal with Japanese troops "cements our commitment to the Indo-Pacific." What's more, it wants to join a Pacific trade pact.
Trade is therefore also part of the talks. Britain was approved last February to proceed with a bid to join the 11-nation Asia Pacific trade bloc now officially called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. The former TPP, which was orchestrated by Japan and so famously abandoned by the United States, eliminates some 95% of the tariffs between member nations. Britain sees the benefit of the geographic leap.
The two heads of state are due to meet at the Tower of London, the central fortress and former prison that is home to the British royal family's Crown Jewels. Reuters reports that Sunak and Kishida will also take a tour to see a set of Japanese armor presented by the first Tokugawa Shogun to King James I in 1613 on the occasion of the first trade agreement between Britain and Japan.
One global economic outlook I just received today promises that "Recessions Beckon." But the headline is misleading if you're in Asia. Those recessions are likely to come in the United States and Europe. China's opening up won't fully offset those downtrends, while the Chinese recovery "will take time to gain traction," the report from Nomura's global economists notes.
The Asia Pacific region should average economic growth of 4.2% next year, with the Philippines (4.3%), Indonesia (4.4%), India (4.5%) and China (4.8%) above that trend. It's Japan (1.9%) that's not known for growth and dragging the average down, as are Australia (0.1%), New Zealand (0.5%) and Singapore (1.4%). But they're still posting growth, quite solid compared with past trends in the case of Japan. While there are questions whether Australia will avoid recession, only South Korea (-0.6%) is looking at a contraction next year.
U.S. investors may want to make a resolution to review their international allocation this year. It will likely be the second half of 2023 before Asia's recovery really clicks, with an export and tech-cycle bottom likely to coincide with China's recovery. Earnings, fundamentals and growth prospects in Asia look good.