Japan, AI, rate cuts

As the world grapples with renewed fears of a global recession, analysts say Asia stands out as a region to watch, with the potential to outperform the broader global market.

On the face of it, Asian stocks as a whole have had a modest rally so far this year compared to U.S. and European stocks. The MSCI International All Country Asia-Pacific Index is up 4.71% year-to-date, while the Composite Index S&P500 and Pan-European Euro Stoxx600 are up 13.25% and 6.65% respectively.

But Asia is more economically diverse than Europe or the US, and there are still bright spots in the region, especially Japan and South Korea.

Earlier this month, Nomura said Asia was likely to outperform in the medium term, noting: “The prospect of slowing global growth and the nearing end of policy rate hikes will force investors to focus on a healthy economy while looking for new opportunities. They are likely to look for opportunities,” he said. Basic things. “

The report added that Asian economies “by and large” have avoided large-scale qualitative easing, putting the region in a better position in terms of fiscal sustainability, inflation concerns and the health of the financial system. rice field.

Nomura analysts expect China’s economy to slow, while Asia’s GDP growth will “sustainably” outperform other emerging markets and the United States, while India and Southeast Asia will outperform over the next decade. It is expected to be the fastest growing country.

Daniela Gombert, an analyst at wealth management firm DWS, shared that view, saying: “Over the 12-month period, Asian and European stock markets look much more promising than the U.S. market.” said.

Pointing to Japan’s stock market in particular, Gombert said, “Unlike some 30 years ago, valuations aren’t as exaggerated as they were then. It allows us to become part of the department,” he said. Story. “

The Japanese market led the rally as most of Asia recovered from the pandemic, with the Nikkei Stock Average up about 25% year-to-date and the broad Topix up about 21.5%.

The company said China’s resumption of economic activity and the return of tourists should bode well for Japan. So in the short term, Gombert believes Japan should be a very interesting market for investors, even if prices are already strong.

The BOJ will also be in the spotlight after Kazuo Ueda took office earlier this year. Ueda is widely expected to pull back from the BOJ’s ultra-dovish monetary policy, but so far he has made no changes to the BOJ’s policy.

Private banking firm Lombard Odier said Japan’s headline inflation rate had recovered and spring wage talks resulted in one of the highest base salaries in decades.

The company also predicted that “2023 will be another year in which inflation remains above target” and that the Bank of Japan will respond by ending its “yield curve control” policy later this year.

At the central bank meeting in June, a policy maker said, “A review of the treatment of yield curve control should be discussed at an early stage.” Comply with YCC policy.

The Bank of Japan announced in April that it would conduct a “big picture review.” [its] But Lombard Odier still expects the BOJ to end its yield curve control policy before the review is over.

While the US Federal Reserve has hinted at the possibility of another 50-basis-point rate hike by the end of the year, Morgan Stanley forecasts that inflation has peaked in most of Asia, and the region’s Almost all central banks have paused their rate hike cycles, he said.

In a note earlier this month, a team of four economists said: “We believe this moratorium will persist, and in fact further disinflation gives room for rate cuts as the central bank does not need to raise real interest rates into the limit zone. ‘ said.

Morgan Stanley said the Asian inflation process was “on track” and expected inflation to return to within its target range in 80% of the region within the next three months.

As such, we expect Asian central banks to cut rates before the Fed, with early movers like Indonesia cutting rates as early as the fourth quarter of 2023.

Technological development is another reason for optimism in Asia. With the emergence of generative artificial intelligence like OpenAI’s ChatGPT, Google’s Bard, and Baidu’s Ernie Bot, the hardware that powers these AI tools, namely semiconductors, is also gaining attention.

Countries are pouring huge amounts of subsidies into building chip factories and expanding semiconductor production, such as the US Chip Act, which provides $280 billion in subsidies over the next decade.

Marco Baresi, senior equity research analyst at Lombard Odier in the tech sector, stressed that Japan, South Korea and Taiwan also offer tax credits and subsidies.

Moreover, despite US restrictions on China’s acquisition of advanced chip technology, China is committed to supporting the semiconductor industry, with an estimated $143 billion worth of subsidies could be paid out over five years. said Barresi.

“Just as the rise of the iPhone built an entire industry around mobile applications and the rise of cloud computing spawned a new field of software companies, AI is poised to power a new generation of technology startups and companies,” Barresi said. will produce applications,” he added.

He also pointed out that the most sophisticated computing chips will account for nearly a third of global semiconductor revenue in 2022, with Asian companies producing the majority of these advanced chips. bottom.

Production of these advanced chips is dominated by two Asian companies: Taiwan Semiconductor Manufacturing Company and South Korea’s Samsung Electronics.

“We prefer semiconductor makers that serve the cloud market and are exposed to developments in AI and electrification,” Barresi said. It fits well with our general taste.”