Why Asia Will Dominate in 2023

Summary

• Asia is the only region expected to see growth accelerate in 2023. It will likely sink in the US, Western Europe and EMEA from 2022 levels.
• Both China and Japan could start rate hiking cycles just as the Fed and others end theirs.
• Consequently, 2023 will be the year investors must know as much about Asia as they do US and European growth dynamics.

The Year of Asia

Gui Mao. Water Rabbit. That’s the symbol of the Chinese New Year that just started. In symbolic terms, the rabbit represents peace and introspection. But it can also mean hope and that could well be the story of China and broader Asia in 2023. While we’re not sure it will be all good news for the region, we do think that unlike 2021 and 2022 when the US and Europe dominated macro, this is the year that Asia could dominate just as much.

Growth is one reason. Here are regional growth (consensus) expectations for 2023 (compared to 2022):

US:                                  +0.5% (+2.1%)

Western Europe:         -0.1% (+3.4%)

EMEA:                            +0.4% (+0.8%)

Asia-Pacific:                  +4.3% (+3.8%)

Spot the pattern. Asia is the only region expected to see growth accelerate in 2023. A big reason is the re-opening of China. The country has gone from zero-COVID to a full re-open with a heavy sprinkling of credit and regulatory easing thrown into the mix. Growth is expected to jump to 5.1% in 2023 compared to 3% in 2022. Sequentially, China growth is expected to be 4% annualised in Q1, 6.4% in Q2 and 6.8% in Q3. That type of momentum stands in contrast to most other regions where growth momentum is expected to fall.

But it’s not just China. The 1.1% growth Japan achieved in 2022 is expected to be repeated in 2023. While Indian growth is expected to fall from 8.7% in 2022 to 6.9% in 2023 – that is line with the pre-COVID average. Indonesian growth is expected to remain around 5%.

While these growth expectations are impressive, we could see exuberance build over the course of the year, which could then see sharp reversals. The bottom line is that while investors have intimate knowledge of US and European growth dynamics, this is the year they will need to understand Asia.

Then there is the monetary policy of Asia in 2023. The Bank of Japan is in the process of exiting the longest yield curve control policy in modern history. This is likely to have both intended and unintended consequences. Numerous financial institutions have taken advantage of low Japanese interest rates to go on shopping sprees around the world. China itself is currently engaged in credit easing, but inflationary pressures could build, and they could start to raise rates. The two largest Asian economies could therefore be starting rate hiking cycles just as the Fed and others are expected to end theirs.

The implication of the year of Asia is that it’s not just the Fed and US hard or soft landings that matter in 2023. There is a de-synchronised investment play in Asia, but also there could be global implications of strong Asian growth notably on commodities and BoJ tightening. Therefore keep an eye on the Fed, and the other on Asia.