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Asia markets in 2024 – Navigating monetary policy and growth dynamics

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While US monetary policy will remain a key theme in Asia throughout 2024, the region’s markets still offer opportunities supported by exciting economic growth stories and strong earnings potential.

In 2024, investors will navigate a complex monetary policy landscape that could have a significant impact on a wide range of asset prices in Asia. And at the start of the year, bonds markets are exhibiting optimism that the US Federal Reserve could be about to lower interest rates – a move that would increase the risk appetite that is typically beneficial for Asian assets.

These hopes might be misplaced, said Stephen King, Senior Economic Advisor, HSBC: “There’s a significant danger that although rate cuts could come this year, they might have to be reversed sooner than markets expect.”

With US inflation down from its most recent peak in 2022, there could be room for the Fed and other central banks to shift to a more dovish monetary policy stance. But US inflation is still higher than pre-pandemic rates, while the world’s largest economy has consistently surprised on the upside. Unemployment in particular, is at its lowest level since the late 1960s.

USD dynamics in Asia

One way that US monetary policy will be felt in Asia is via exchange rates, as loosening financial conditions could provide a tailwind for Asian currencies. But the drivers that typically influence the USD are relatively stable, suggesting that in 2024 the US currency could have another strong year.

“We see the USD making a comeback, as the currency’s main drivers have not significantly changed,” said Paul Mackel, Global Head of FX Research, HSBC.

One of these drivers is the global growth backdrop, which remains subdued, despite continued strength in the US. This is important because when the world economy is doing well, the USD typically weakens. Another driver is US monetary policy. Even if the Fed and other central banks start cutting rates in 2024, which has the potential to support the global economy, the effect will not be felt until next year.

This story is playing out in Asia, where the region’s currencies rebounded at the end of 2023 on anticipation of rate cuts across the world’s major economies. The rally was short lived, as seen in a weak start to 2024 – suggesting that the recovery for Asian currencies could be choppy for the rest of the year. Other factors to consider include the growth trajectory of the Chinese economy and low risk appetite tempering portfolio flows into the region.

Asia rates – looking for monetary easing

Despite the rise in US rates in 2023, Asia bonds performed well, with strong fixed income returns seen in markets like the Philippines and Korea. The Fed’s dovish tilt in December has strengthened the case for a bond rally in 2024.

While a decline in US rates could benefit the region’s long-end bonds, a continued rally in local bonds needs to be supported by monetary easing by regional central banks. Higher policy rates in India, Indonesia, and the Philippines means that these countries have more room to ease, which generates the potential for duration performance.

At the start of the year, there are a number of factors influencing China rates. These include pledged supplementary lending and how it could impact growth; the government’s policy stance, which remains prudent; and a recent cut in commercial deposit rates, which opens up room for the central bank to announce another round of lending rate cuts in the near-term.

“Overall, a gradual downward glide path for China rates remains our base case scenario,” said Pin Ru Tan, Head of Asia Pacific Rates Strategy, HSBC.

Asia equities – improved risk appetite needed

For equities, the sharp decline in US bond yields at the end of 2023 sparked a rally in Asian equities, and evidence from previous cycles suggests that this should be particularly positive for China’s H-share market, Indonesia, and the Philippines, as risk appetite improves1.

After a tough 2023 for Chinese stocks, there are two potential scenarios for the market in 2024. In a pessimistic scenario, China’s growth disappoints and global bond yields rise, resulting in more declines for Chinese equities. In a more positive outcome, positive earnings surprises and lower global bond yields could set the scene for substantial gains from current levels2.

“Chinese stocks have the potential to surprise on the upside if sentiment towards the market reverses.” said Herald van der Linde, Head of Equity Strategy, Asia Pacific, HSBC.

Other markets to look out for in 2024 include India, where the local market provides an exciting earnings growth story that is supported by both global and domestic factors. At the same time, the country’s large caps have lagged the recent bull run and are now priced at appealing valuations3.

Moving finally to ASEAN, Indonesia’s medium-term structural growth prospects remain strong, while global factors remain favourable4. In Thailand, domestic consumption is robust, offsetting the slow return of Chinese tourists5. Malaysia, on the other hand, continues to grapple with a downturn in global trade, with the export-dependent country impacted by the declining price of oil, though a rebound in global demand for electronics could support sentiment6.

While monetary policy, both in the US and regional markets, will remain a key theme across Asia for 2024, it is important not to overlook the considerable opportunities across the region in all asset classes, arising from economic growth stories, as well as strong earnings potential. Investors will be best prepared to navigate the Year of the Dragon by taking a balanced assessment of local and global factors.

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