Traders looking for a turnaround in Asian stocks in 2022 will be keeping a watchful eye on Chinese stimulus, the direction of the dollar, fading retail participation and the outlook for equity listings.
The case for a rebound should be aided by lower valuations after the MSCI Asia Pacific Index underperformed its global counterpart by around 20 percentage points last year. It declined some 4% with China’s regulatory crackdown and slower growth weighing on the index, but investors are hopeful that Beijing’s return to pro-growth policies and higher vaccination rates in the region will reverse the trend this year.
“It’s possible that Asian stocks outperform their global peers” as regional economies should start to see greater benefits from higher levels of vaccinations and reopenings, said David Chao, global market strategist for Asia Pacific ex-Japan at Invesco.
Here are five areas of focus for Asia investors as they navigate the new year:
Traders expect mainland stocks to recover this year as Beijing pledges to bolster slowing economic growth dragged by a property slump and weak consumption. Various ministries have vowed support including greater cuts in fees and taxes, while the People’s Bank of China is already pumping more liquidity into the financial system. Further easing measures are also expected.
Political events such as the National People’s Congress in March will be closely watched for more cues on pro-growth policies and the “common prosperity” drive. The 20th Party Congress in the second half of 2022 is also important because it could cement President Xi Jinping ruling for life.
And after a year of regulation that battered tech, private tutoring and property stocks, BlackRock Inc. and HSBC Holdings Plc are among those saying the worst of China’s regulatory crackdown may have passed. “It seems important to have a focus on stability and growth in such an important year — and not restructuring and new regulations,” said Herald van der Linde, HSBC’s head of equity strategy for Asia Pacific.
China, the only country in the world now with a Covid Zero policy, will likely keep its borders shut ahead of the Winter Olympics in February given the resurgence of domestic virus cases. But once international borders open, it could be a major catalyst for cyclical shares from airlines to luxury stocks across the region, with Chinese tourists the biggest spenders in the world.
“In terms of expectations, there’s very little priced in for the reopening of China,” said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management.
On the other hand, more lockdowns could send shock waves through Asian supply chains. Regional giants such as Samsung Electronics Co. and BYD Co. are already facing production issues in Xi’an.
With the Federal Reserve tapering stimulus and expected to hike rates at least three times next year, a stronger dollar’s impact on Asian assets is a concern. Together with weaker Chinese growth, it could weigh on commodities and currencies in 2022, adding to constraints on emerging Asian economies at a time of domestic monetary policy tightening.
Southeast Asian shares look particularly vulnerable to capital outflows as omicron spreads, although a repeat of the 2013 taper tantrum is unlikely. Still, a weaker yen is good for Japan’s exporter-heavy stock market.
JPMorgan Asset Management strategist Tai Hui sees the Fed communicating adequately “to prevent sharp swings in bond yields, interest rates and exchange rates,” limiting the negative impact on Asian stocks.
After a two-year frenzy, retail investor participation and new account openings in places like South Korea and India are showing signs of fatigue. That could reduce volatility and crowded trades in markets in 2022, allowing for more participation by fundamental-based overseas investors.
“A lot of foreign investors who tend to be more fundamental would start looking at Korean stocks again,” Chetan Seth, Asia Pacific equity strategist at Nomura Holdings Inc. said at a briefing this month. “We are expecting two rate hikes from Taiwan’s central bank sometime in 2022, and that could be the catalyst which just slows down retail trading participation.”
After a tumultuous year for Hong Kong stock listings, investors will be looking forward to a number of so-called homecoming IPOs including Didi Global Inc. Appetite for those listings could cool, however, on account of China’s regulatory tightening.
Meanwhile, the blank-check company craze could finally make its way to Asia, as the first wave of special purpose acquisition companies gain clearance to list in Singapore and Hong Kong rolls out a rulebook.