(report producer/analyst: Ping An Securities Zhong Zhengsheng Zhang Deli Chang Yixin Zhang Lu)
Since 2022, thanks to the outstanding performance of exports, some Asian economies represented by ASEAN and India have maintained strong growth resilience, but under the pressure of greater capital outflow, the performance of the Asian capital market is not satisfactory, and the stock, bond and exchange rate three times.
Looking forward to 2023, where will the Asian economy go and where can the opportunities in the capital market be explored?
This article reviews the performance of the Asian economy and capital market in 2022. Based on judging the Asian economic trend in 2023, it looks forward to stock, bond, foreign exchange and commodity market opportunities, in order to provide an Asian perspective for global asset allocation.
1. Review and Outlook of Asian Economy
.1 2022 Asian Economy Review
There are major differences in the development level and economic volume of Asian economies. We divide Asian economies into four categories: China (excluding Hong Kong, Macao and Taiwan), Japan, South Korea and other economies, and review the economic situation in 2022 one by one.
first, China's economic growth rate has slowed down. According to IMF data, China's GDP in 2021 was US$17.5 trillion, accounting for 46.3% of the total Asian economy. Therefore, China's economic situation has a decisive impact on the overall Asian economy. In 2021, China's GDP was 8.1% year-on-year, contributing an important force to the year-on-year growth of Asia's GDP by 6.1%.
However, in 2022, China's economy faces the risk of stalling:
First, the impact of the new crown epidemic, and GDP in the second quarter, which was the worst affected by the epidemic, only increased by 0.4% year-on-year; second, the real estate market cooled down, and the Chinese real estate industry experienced an event impact in July, extending the time when the industry bottomed out . At the end of May, China successively introduced a number of policies to stabilize growth, including increasing infrastructure investment, stimulating consumption with automobiles as the main focus, promoting the maintenance of housing and releasing the demand for renewal of manufacturing equipment. China's economy is recovering steadily. In September, Asian Development Bank expects China's GDP 2 to grow by 3.3% year-on-year in 2022.
Second, Japan's GDP growth rate fell slightly. Japanese Cabinet Office data shows that Japan's GDP in the first and second quarters of 2022 increased by 0.1% and 2.2% year-on-year respectively. In late March 2022, Japan's epidemic prevention policy began to relax, and consumption of semi-durable goods and services, including clothing, tourism, overseas catering, etc., began to recover quickly.
corporate profits improved, driving the investment of non-resident private sector in Japan to positive year-on-year in the second quarter. In the second half of 2022, Japan's private consumption continued to recover steadily, but exports may have limited room for recovery due to the obstruction of the supply chain (especially obvious in the automobile industry chain). In August 2022, Japan's CPI was 3.0% year-on-year, and the core CPI was as high as 2.8% year-on-year. The Russian-Ukrainian conflict and the depreciation of the yen have an important boost to Japan's consumer goods inflation, which may weaken the consumption willingness of low-income groups in the future.
A report released by the Asian Development Bank in September showed that it expects Japan's GDP to slow slightly from 1.7% in 2021 to 1.4% in 2022.
Third, South Korea's economic growth rate declined, but its performance was still relatively impressive. South Korea's GDP grew by 2.9% year-on-year in the first half of 2022, leading among major Asian economies. Benefiting from strong exports of semiconductors and petroleum products, South Korea's exports in the first half of the year increased by 6.0% year-on-year.
In order to cope with the economic downturn, South Korea's government spending increased by 5.4% in the first half of 2022. The labor market has recovered from high prosperity, with South Korea's private sector consumption increasing by 4.2% year-on-year in the first half of the year. However, South Korea's investment performance in the first half of the year was sluggish due to high raw material and energy prices and weak corporate confidence.
2022 South Korea's economic growth rate is likely to fall further in the second half of 2022: The reason is that the post-epidemic restart has weakened its role in promoting the economy; second, rising interest rates have suppressed consumption and investment; third, the slowdown in growth of major trading partners means that South Korea's exports are facing great pressure.
South Korea's exports fell to 2.8% year-on-year in September this year, the lowest level since November 2020. According to the Asian Development Bank's forecast for September 2022, South Korea's GDP will decline from 4.1% in 2021 to 2.6% in 2022.
is fourth. Except for China (excluding Hong Kong, Macao and Taiwan), Japan and South Korea, the economy will remain strong in 2022. IMF data shows that other Asian economies except China, Japan and South Korea account for 35.9% of Asia in 2021, of which ASEAN and India accounted for 9.0% and 8.1% respectively.
Asian Development Bank's September 2022 report showed that the GDP of ASEAN countries will rebound significantly from 3.3% in 2021 to 5.1% in 2022; except for Singapore , the GDP growth rate of other countries in 2022 rebounded, especially Vietnam (from 2.6% to 6.5%), the Philippines (from 5.7% to 6.5%) and Malaysia (from 3.1% to 6.0%). These countries benefited from adjustments in epidemic prevention policies and strong foreign demand; in the first and second quarters of 2022, India's GDP was 4.1% and 13.5% year-on-year respectively. Among them, due to the return from the epidemic to normal in the second quarter, private consumption surged, which drove India's economic growth. 14.0 percentage points.
According to the Asian Development Bank's forecast in September 2022, India's GDP will slow down from 8.7% in 2021 to 7.0% in 2022.
.2 2023 Asian Economic Outlook
Asia is mainly based on developing economies and has a high degree of openness to the outside world. It is susceptible to changes in the economic situation and policy in major developed economies such as Europe and the United States.
Outlook In 2023, we believe that from the perspective of external shocks, the main lines of Asian economy and capital markets in 2023 will undergo a significant switch compared with 2022.
The exports of major Asian economies performed strongly in 2022, so from the perspective of economic fundamentals, foreign demand will support the Asian economy in 2022. The total export volume/GDP is used to measure the foreign trade dependence of . In 2020, the trade dependence of ASEAN, South Korea, China (excluding Hong Kong, Macao and Taiwan), Japan and India were 53.8%, 31.3%, 17.7%, 12.7% and 10.6% respectively. As the US and European economies have not yet entered a recession, exports from major Asian economies continue to show resilience this year.
htmlIndia, Japan, China and South Korea, denominated in local currency in August, increased by 25.7%, 16.6%, 14.2%, and 13.5% year-on-year, respectively, which were higher than the two-year average growth rate of 13.1%, 3.9%, 12.3% and 9.0% for the whole year of 2021.Therefore, strong exports will continue to contribute positively to Asian economic growth in 2022.
But in 2022, Asia faces greater pressure on capital outflow.
After the outbreak of the new crown epidemic, the United States has implemented extraordinary monetary easing policies and active fiscal policies, and demand in the private sector is strong.
However, the supply side faces constraints such as supply chain disruption and the heating of global trade protectionism. Global energy and food prices rose sharply after the Russian-Ukrainian conflict, further pushing up the inflation pressure of the United States.
In order to defend its credibility, the Federal Reserve opened a "chasing-up" tightening, raised interest rates by 25bp and 50bp in March and May 2022, respectively, and 75bp in three consecutive interest rates in June, July and September.
The dot chart released by the Federal Reserve in September 2022 shows that the median federal funds target interest rates in 2022 and 2023 are 4.4% and 4.6%, respectively, which means that the Federal Reserve may also raise interest rates by 125bp in 2022.
The Federal Reserve tightened beyond expectations, and the US economy performed stronger than Europe and Japan, causing the interest rate of US bond soaring and the US dollar index to rise sharply in 2022. The 2-year U.S. Treasury yield rose to a high of 4.37% from 0.73% at the end of 2021 (September 27), the 10-year U.S. Treasury yield rose to a high of 4.02% from 1.51% at the end of 2021 (September 28), and the U.S. dollar index rose to a high of 114.2 from 96.0 at the end of 2021 (September 27).
Although facing pressure from the strengthening of the US dollar index and the rapid rise in long-term U.S. Treasury yields, the pace of currency tightening in most Asian economies is slower than that of the Federal Reserve, which has led to the depreciation of most Asian currencies and capital outflows.
China's monetary policy insisted on "mainly me" and lowered the MLF and reverse repurchase interest rates beyond expectations in August 2022; the Bank of Japan adhered to the yield curve control strategy, and the Ministry of Finance entered the market to interfere in the yen exchange rate on September 22, seeking "internal and external balance"; as of the end of September, India and South Korea have raised interest rates by 190bp and 150bp respectively this year, which is less than the 300bp of the Federal Reserve. Barclays data shows that Asian bond market net outflows were US$69.5 billion from January to July 2022.
According to statistics from Thomson Reuters , Asian emerging market stock markets outflows in the first three quarters of this year were US$69.7 billion, higher than US$47.6 billion in the 2008 global financial crisis.
Outlook In 2023, we believe that the main line of Asian economy and capital markets affected by external factors will be switched compared with 2022. After the economic recession in Europe and the United States, the pressure of slowing foreign demand in Asian economies oriented towards exports will be clearly reflected. In the capital market, the pace of the Fed's interest rate hike is expected to slow down, and it may even cut interest rates in 2023, the pressure on capital outflow in the Asian market may weaken. The US economic recession in 2023 is almost inevitable, and there is a risk of a "hard landing".
First, learns from history. In the 1970s and 1980s, when the US CPI rose to more than 5% year-on-year, the economic recession came as scheduled. In 2022, the US CPI reached a maximum of 9.1% year-on-year, not only exceeding the previous level that triggered the recession, but also exceeding the level during the "soft landing" period of the US economy in 1970.
Second, Currently, the Federal Reserve has shown strong determination to curb inflation and is willing to pay the price of an economic recession. This means that similar to the Volcker period in 1981-82, this Fed tightening may be enough to "create" a recession.
Third, cannot rule out the risk of recurring inflation in the future. If a new supply shock occurs (such as OPEC sharply cut crude oil production), or the Fed's actual tightening is insufficient, then U.S. inflation may still be repeated, thereby causing a greater recession in the subsequent future.
Compared with the United States, Europe has a greater risk of economic recession.
2021 data shows that about 48% of Europe's coal, 25% of oil and 48% of natural gas imports come from Russia. With the arrival of autumn and winter in the northern hemisphere, the European energy crisis may intensify, and the drag on the economy is particularly obvious.
IMF research shows that the output losses caused by the interruption of Russian natural gas supply to European countries generally reach about 2%.
In addition, the energy crisis pushes up European inflation, and the euro zone monetary policy tightens, which further increases the risk of European recession.
European economic leading indicators have weakened significantly, Euro Zone Sentix Investment Confidence Index fell to -31.8 in September, lower than Euro debt crisis during the period; 19 countries in the Euro zone consumer confidence index was -29.9 in September, setting a new low since statistics were in 1985.
The European economy may enter a recession in the fourth quarter of 2022, putting pressure on the growth of Asian economies with obvious export-oriented characteristics.
Asian Development Bank The forecast report released in September 2022 showed that China's GDP grew by 4.5% year-on-year in 2023, Japan's GDP grew by 1.6% year-on-year, South Korea's GDP grew by 2.3% year-on-year, and other Asian economies except China, Japan and South Korea grew by 5.3% year-on-year.
While the economic recession in Europe and the United States drags down Asian exports, the pace of Federal Reserve tightening slowed down in 2023, easing the pressure on capital outflows in Asian markets.
From late September to early October, 2022, the main line of US financial market trading went from tightening to recession to tightening, because the US data released during the period was greatly disturbed: On the one hand, in September 2022, the US ISM manufacturing PMI recorded 50.9, lower than the expected value of 52.2 and the previous value of 52.8, which is the lowest since May 2020. On the other hand, the September non-farm data released on October 7, 2022 was better than expected, and warmed up tightening expectations.
We believe that the US economic recession is inevitable. In early October 2022, the Federal Reserve Vice Chairman Brainard also said that the interest rate hike policy has dual risks. The United Nations Conference on October 3, 2022 called on the Federal Reserve and other central banks to stop hikes to avoid the economy from falling into long-term stagnation.
Therefore, the pace of the Federal Reserve's interest rate hike in 2023 is expected to slow down (as of October 8, 2022, CME interest rate futures showed that interest rate hikes once in 2023), and there is even a possibility of interest rate cuts after the recession, which will narrow the spread of between the Asian bond market and the US bonds, ease the pressure of depreciation of emerging markets, and the impact of capital outflows on the Asian market is also expected to weaken.
2. Outlook of Asian capital market
.1 Stock market
Since 2022, global stock markets have been violently turbulent, and Asian stock markets have fallen for three consecutive quarters due to the Russian-Ukrainian conflict pushing up inflation, the impact of the new crown epidemic on supply chains, and the shift in monetary policies of major developed countries.
Overall, Asian stock market performed weakly compared with global stock markets, with the MSCI Asian index falling 29%, a deeper decline than the MSCI Global and MSCI US indexes.
points to the region, the stock indexes denominated in local currencies in representing economies have a large differentiation. The adjustment ranges of South Korea, Nepal , Vietnam and China's A-shares, Hong Kong stocks, and Taiwan stocks in the first three quarters of 2022 were more than 20%, down 27.6%, 26.6%, 24.4%, 23.0%, 26.4% and 26.3% respectively. However, the Indonesian Jakarta Comprehensive Index, the Laos LSX Index, and the Singapore EDI Straits Times Index rose 37.2%, 7.0% and 0.7% respectively. In terms of styles, MSCI Asian large-cap style underperformed small and medium-cap 2.8 percentage points, and growth stocks underperformed value stocks by 10.1 percentage points. Whether compared with the MSCI Asia Index or the MSCI Asia (except Japan) index, the performance of the small and medium-sized market value style is stronger than the overall index.
Outlook In 2023, the Asian stock market is expected to complete the bottoming.
The external monetary and financial environment is tending to ease, and it may support the valuation of Asian stock markets and the risk preference of . The Asian stock market is expected to bottom out in 2023. However, based on the risks of global recession and the downward pressure on fundamentals of Asian economies, there is still uncertainty about the overall rebound space and time of the market.
However, compared with other regions, the allocation value of the Asian stock market is still relatively high: On the one hand, Asian stocks have good medium- and long-term risk and return performance and have better allocation value; on the other hand, after the previous adjustment, the overall valuation level of the Asian stock market is relatively reasonable, and based on the expected profit growth rate, the Asian stock market is relatively attractive compared to other regions in the world. Market style and dominant sectors may switch with the emergence of inflection points in the stock market and external environment.
Before the Federal Reserve's currency tightening and the turning point of the US dollar index appeared, the stock market was still "headwind". The high-dividend dividend sector and the relatively low-valuation small and medium-sized value sector are expected to continue to dominate. As the pressure on the global economic downturn increases, the pace of tight currencies slows down, the pressure on the US dollar outflow is eased, the monetary policy space of Asian economies is gradually opened, and the growth sector is expected to benefit from the improvement of liquidity and start a rebound first.
1. The external environment of Asian stock markets is expected to improve
22 Since the beginning of 2022, the conflict between Russia and Ukraine has made the energy tension in Europe even worse, and the economic differentiation of Europe and the United States has intensified. At the same time, global inflation risks have risen again, driving the Federal Reserve to accelerate the tightening of currency and driving the rapid rise in U.S. bond interest rates. With the addition of the two, the US dollar index rose rapidly, and the strong US dollar attracted international capital to return to the United States, and the global " dollar shortage " intensified.
The International Capital Flow Report (TIC) data released by the U.S. Department of Treasury shows that from the second half of 2021 to the first half of 2022, the cumulative monthly international capital inflows of US$1.36 trillion, reaching the highest point of the 12-month statistical data since 1980.
Against this background, the Asian stock market faces greater pressure on capital outflows, falling sharply and underperforming major non-US economies around the world.
The external pressure faced by the Asian stock market is expected to usher in a turning point in 2023. Historically, before the Fed rate hike cycle began and in the early stages of interest rate hikes, the U.S. dollar index often strengthened as expectations for US dollar asset returns rose; but in the middle and late stages of interest rate hikes, the U.S. dollar index fluctuated and weakened as concerns about the U.S. economic outlook increased.
According to the dot chart of the Fed's September interest rate agenda meeting and the implicit interest rate expectations of CME futures , we expect the pace of the Fed's interest rate hike will slow down in 2023. This round of interest rate hike cycle is coming to an end. With the increase in the risk of global economic recession, the possibility of the Fed's interest rate cut in the second half of 2023 cannot be ruled out.
This may mean that the US dollar index will gradually peak, and the pressure on capital outflows faced by Asian stock markets is weakening.We can review the relationship between the US dollar index and the performance of Asian stock markets since 2000.
On the one hand, during the period when the US dollar index strengthened, the MSCI Asia (except Japan) index often tended to decline, and the excess returns compared with the global non-US economies also weakened accordingly.
Typical periods are:
1) From early 2000 to June 2001, the Internet bubble burst, and the US dollar index rose from 101.8 to 119.5. During the same period, the MSCI Asia (excluding Japan) index fell by 41.5%, a decrease higher than the global 24.2% and 28.3% of non-US economies.
2) From March to November 2008, under the impact of the international financial crisis, the US dollar index rose from 71.8 to 86.55. During the same period, the MSCI Asia (excluding Japan) index fell by 62.4%, a decrease higher than the global 48.5% and 54.3% of non-US economies.
On the other hand, during the weakening period of the US dollar index, the MSCI Asia (excluding Japan) index often performs strongly, and the excess returns of global non-US economies have risen.
Typical periods are:
1) From early 2002 to December 2003, the downward cycle of the US dollar index began, falling from 120.2 to 86.9. During the same period, the MSCI Asia (excluding Japan) index rose by 11.4%, an increase higher than the global 4.4% and 10.1% of non-US economies.
2) From December 2005 to November 2007, the US dollar index fell from 91.6 to 76.5. During the same period, the MSCI Asia (excluding Japan) index rose by 36%, an increase of more than 15.4% in the world and 21.5% in non-US economies.
2. Asian stock market has medium- and long-term allocation value
From a medium- and long-term perspective, Asian stock market has good risk and return performance and has good allocation value in global investment.
We counted the stock market performance in the last five natural years (2017 to 2021): the annualized return of the MSCI Asia Index is about 7.4%, which is 0.44 and 0.81 percentage points higher than the MSCI Europe and the Global (excluding the United States) indexes, respectively; the annualized volatility of the MSCI Asia Index is about 15.9%, which is 3.22 and 0.79 percentage points lower than the MSCI Europe and the Global (excluding the United States) indexes, respectively.
From this point of view, the long-term returns of the Asian stock market (especially after excluding the relatively stable Japanese market) performed better, and the volatility was relatively low. At the same time, the Asian stock market has little relevance to major economies in Europe and the United States, which can better hedge against non-systematic risks, which will help expand the forward boundary of asset allocation under the "mean- variance " model and improve the portfolio Sharp ratio .
3. The current valuation level of Asian stock market is relatively reasonable
. Currently, the valuation level of major Asian economies stocks is relatively reasonable.
As for its absolute valuation of , as of the end of the third quarter of 2022, the MSCI Asian Stocks (excluding Japan) index had a price-to-earnings ratio (PE) of MSCI Asian Stocks (excluding Japan) index was 13 times, lower than 16 times of the MSCI Global Index and 16.7 times of the developed market index; the price-to-book ratio (PB) was 1.4 times, also lower than the global and developed market index; the dividend yield was 3.0%, higher than the global and developed market index.
In terms of its relative position, as of the end of the third quarter of 2022, the index price-to-earnings ratio (PE) of major Asian economies was mostly at a low level in recent years.
Specifically, the PE levels of China's A-shares, Hong Kong stocks and Taiwan stock representative indexes are in the 5.5%, 2.3% and 0% quarters since 2016 respectively; the PEs of the South Korean Comprehensive Index, Vietnam Ho Chi Minh Index, Philippines Manila Index, and FTSE Malaysia Index are also below the 10% quarters since 2016.
4. The horizontal balance of Asian stocks is relatively high
is expected to slow down in 2023, but the growth rate is still attractive compared to other regions.
On the one hand, in terms of the macro environment, after the economic recession in Europe and the United States, the pressure of slowing foreign demand in Asian economies oriented towards exports will be clearly reflected, which will lead to the overall profitability of listed companies; on the other hand, compared with other regions, the expected growth rate of EPS in major Asian economies is still relatively high.
According to the forecast at the end of the third quarter of 2022, the EPS growth rate of Japanese stocks in the next 12 months is higher than that of developed economies such as Australia, the United Kingdom, Germany, France, and Canada; the EPS growth rate of major Asian economies such as India, China, Saudi Arabia, , and Indonesia is higher than the overall level of emerging market countries.
.2 Bond market
2022 In the first three quarters of 2022, most Asian treasury bond yields rose, and the bond index , denominated in US dollars, has a large adjustment. Under the influence of rising inflation expectations and accelerated monetary policy tightening, the 10-year U.S. Treasury bond interest rate rose by about 231bp in the first three quarters of 2022. Asia faces great pressure on capital outflows, with most of the exchange rate depreciating, and some countries followed the Federal Reserve's interest rate hike, which led to a general rise in Treasury bond yields.
Among the major economies, South Korea, Singapore, Thailand, India, and Pakistan 's 10-year treasury bond yields rose between 100 and 200bp, while Vietnam's 10-year treasury bonds rose by more than 300bp at one point; however, the interest rates of China and Japan's treasury bonds were relatively stable, with the 10-year treasury bond yields down 1.5bp and 18.8bp respectively, mainly due to the two countries' insistence on "mainly on me" and maintaining the loose monetary policy trend.
Judging from the changes in the iBoxx US dollar bond index, the Asian US dollar bond index fell 13.3% in the first three quarters of 2022, which was driven by the upward trend of local bond yields and the boost from exchange rate depreciation to US dollar-denominated bond yields.
It is worth noting that the Chinese dollar real estate bond index fell by 40.1%, which constituted a strong drag; while the Chinese dollar bond except financial real estate fell by only 5.1%, which is smaller than other major economies.
Outlook In 2023, the Asian bond market has strong attractiveness.
The growth rate of the outward economy is under pressure, the external monetary and financial environment is improving, and the loose monetary policy operations may reappear. The Asian bond market may face a fundamental environment of "slow wind".
At the same time, the current yield level of Asian dollar bonds has reached a historical high, and the long-term risk-return characteristics are excellent, with short-term, medium- and long-term resonance valuation attractiveness.
Based on supporting factors such as the improvement of the monetary and financial environment, the active adjustment of China's real estate policies, and the historical default risk of Asian dollar bonds is lower than that of other regions, the credit spread of Asian dollar bonds may not further increase significantly, and is expected to usher in a marginal recovery.
in terms of the dominant sector, the investment-grade sector among Asian dollar bonds has a relatively high yield, low medium- and long-term volatility, and relatively controllable credit risk, with the value of over-allocation of the bottom position; high-yield dollar bonds are more elastic during the period of market improvement, but in extreme cases, the tail risk of is higher, and it may be possible to select industries and individual bonds with clearer fundamental prospects outside the real estate industry, and low position game elastic opportunities.
1. Asian bond interest rates may fall as US bond interest rates peak and fall
US Treasury bonds are closely related to the trend of Asian dollar bond interest rates. Since 2006, the direction of changes in Asian dollar bonds has been strongly synchronized with the 10-year US Treasury yield, and because of its relatively high volatility, the direction of interest rate spread trend is often consistent with the direction of changes in 10-year US Treasury yields. However, in some special periods, there was a combination of 10-year U.S. bond interest rates and Asian dollar bond yields rose rapidly, and the interest rate spread widened significantly.
has three typical periods:
1 is the international financial crisis. From June 2008 to the end of the year, the US Treasury bond interest rate fell by 181bp, while the yield of the Asian dollar bond index rose by 216bp against the trend, and the interest rate spread widened by nearly 400bp;
2 is the European debt crisis. From March 2011 to the end of the year, the US Treasury bond interest rate fell by 153bp, while the spread of the Asian dollar bond interest rate rose by 146bp;
3 is the early stage of the outbreak of the new crown epidemic, and the US Treasury bond interest rate fell by 122bp in the first quarter of 2020, while the yield of the Asian dollar bond increased by nearly 100bp against the trend, and the spread widened by about 220bp.
From this point of view, if there is no large-scale debt or a financial crisis breaks out (which triggers a surge in risk aversion demand), in 2023, as the Federal Reserve's interest rate hike cycle comes to an end, US Treasury yields top and fall, and Asian dollar bond yields are expected to go down, and their downward range may be greater than US Treasury yields.
2. Asian bond market has performed well in the medium and long term
In the medium and long term, the Asian bond market has outstanding risk-return advantages and has good allocation value in global investment. We use the bond index released by iBoxx as a benchmark to count the bond market performance in the last 10 natural years (2012 to 2021): the annualized yield of the Asian dollar corporate bond index is about 4.39%, with a volatility of only 2.57%, and a yield volatility ratio of 1.71, which is higher than 1.1 times of global dollar corporate bonds, 0.98 times of domestic US corporate bonds and 1.55 times of euro corporate bonds. It can be seen that the long-term returns of the Asian bond market performed better and the volatility was relatively low.
3. The current valuation of the Asian bond market is at a historical low
Currently, the yield level of Asian dollar bonds is at a historical high, and the valuation is highly attractive.
We analyze the corresponding yield data of the iBoxx Bond Index from 2006 to the end of the third quarter of 2022:
vertical comparison, the yield of Asian dollar bonds was 6.74%, in the historical 94.9% quarter; the yield of Asian dollar bonds was 291bp higher than that of the 10-year US bonds, and is also in the historical 90% quarter.
horizontal comparison, the interest rate spread of Asian dollar bonds compared with global dollar corporate bonds is 80.5bp, which is 58.5bp higher than the historical average level, and is in the historical 93.5% quarter.
4. The "sweeping" environment for the fundamentals of the Asian bond market will reach
In terms of its fundamentals, under the background of downward global exports, it is expected that the economic growth rate of major Asian countries will be under greater pressure in 2023, while the overseas monetary and financial environment is eased, and the monetary policy space may gradually open up. The bond market faces a "sweeping" environment of "economic downturn + monetary easing". It is expected that the credit and liquidity risk of Asian dollar bonds will improve marginally in 2023, and the credit spread may be difficult to further increase significantly. Since the second half of 2021, China's real estate industry has been under continuous pressure, seriously dragging down the performance of Asian high-yield dollar bonds.
However, there is little possibility that the Asian dollar bond interest rate spread will further rise in 2023:
First, the risk of default of high-yield dollar bonds in , except for the Chinese real estate industry, has not increased significantly. If the global monetary and financial situation improves, the debt repayment pressure of related companies is expected to slow down.
Second, China's real estate industry is unlikely to "hard landing" in . With the help of the Chinese government's active adjustment of real estate sales policies and promoting real estate company financing and credit enhancement pilot projects, the industry's credit risks may be difficult to further spread.
Third, after Chinese real estate companies have suffered a lot of risks, other companies are expected to obtain more liquidity support under the " survivor deviation ".
Morgan Asia Enterprise High Yield Index's outstanding bonds have dropped from US$262 billion at the end of June 2021 to US$145 billion at the end of June 2022. The default issuer gradually withdraws from the index, causing the index's average credit rating to shift from B+ to BB-.
Fourth, According to historical experience, the medium- and long-term average default rate of Asian bonds is relatively low. JPMorgan Chase statistics pre-COVID-1 (2002 to 2019) was 1.5%, lower than 5.1% in Latin America, 3.2% in Eastern Europe and 2.6% in the United States during the same period.
.3 Foreign exchange market
1, RMB
0 April-May and August-September 2022, the RMB exchange rate against the US dollar showed two rapid depreciation, among which the US dollar-House against offshore RMB exchange rate once reached 7.27 (September 27, 2022). RMB exchange rate sharply depreciated, on the one hand, because the US dollar index hit a new 20-year high, and the US dollar index reached a maximum of 114.16 on September 27, 2022; on the other hand, because the differentiation of China-US monetary policies has deepened. China's monetary policy adheres to "mainly putting ourselves first". On August 15, 2022, the People's Bank of China unexpectedly introduced interest rate cut tools, and the inversion of China-U.S. bond yields further deepened.
Outlook In 2023, we believe that the pressure on RMB depreciation is limited, and it is more likely to appreciate compared with the US dollar. The exchange rate center of the US dollar against the onshore RMB may be between 6.5-6.7.
In the process of the RMB depreciation from August to September 2022, the RMB depreciation expectations reflected by the risk reversal indicators of the options market did not rise rapidly in April this year, which means that the panic about the RMB in the foreign exchange market has not surged. In 2023, the US dollar index may continue to fluctuate at a high level or even continue to rise.
1980-84, the US dollar index reached a "historical top". Even though the Federal Reserve cut interest rates during the period, the US dollar exchange rate remained strong for a long time. The current logic supporting the US dollar is very similar to that in the 1980s. The US economy has obvious advantages over non-US regions, and the Federal Reserve's confidence in tightening is stronger than other developed economies.
Looking back, even if the US economy moves from "stagflation" to "recession", non-US economic and financial risks may not be eliminated. On the contrary, the market's trust in US dollar assets may increase.
Therefore, in the next 1-2 years, the volatility center of the US dollar index is expected to continue to be higher than the pre-COVID-19 level. Although the upward risks of the US dollar index remain, the convergence of China-US monetary policies from differentiation will support the stabilization and recovery of the RMB exchange rate. The differentiation of monetary policies between China and the United States stems from the differentiation of the positions of the two countries in their respective economic cycles.
From June to the end of July 2022, the US economy was in recession, but the US economic indicators differentiated, especially the employment market, and in general, the resilience of the US economy is much stronger than previous market expectations.
Under multiple pressures such as the spread of the epidemic and the incidental impact of the real estate market, China's actual GDP growth rate in 2022 was significantly lower than the target value determined during the Two Sessions. The misalignment of the economic cycle has caused the monetary policies of the two countries to be misaligned, and the RMB exchange rate against the US dollar is under pressure.
We believe that the economic trends of China and the United States in 2023 are developing in a direction that is conducive to the RMB exchange rate: the US economic recession is almost inevitable, and the risk of a "hard landing" cannot be ruled out; the Chinese economy continues to recover under the promotion of the real estate industry's bottoming out and the continuous formation of physical infrastructure workload.
Currently the market expects that the Federal Reserve cut interest rates in July 2023, China's stable economic recovery and convergence of China-US monetary policies will support the appreciation of the RMB exchange rate.
2, Japanese yen
2022 The Japanese yen exchange rate depreciates significantly. The exchange rate of the US dollar against the Japanese yen depreciated from 1:115.1 at the end of 2021 to 1:144.8 on September 26, 2022, that is, in less than three quarters, the yen depreciated by 20.5%. The reason for the sharp depreciation of the yen is that the Bank of Japan adheres to its yield curve control strategy against the backdrop of accelerated monetary policies in major developed economies.
Even after the Federal Reserve raised interest rates three times in a row at 75bp, the Bank of Japan announced after the monetary policy meeting in September 2022 that it would continue to maintain short-term interest rates at -0.1%, and to maintain long-term interest rates at around zero by purchasing long-term Treasury bonds.
On September 22, 2022, the Japanese Ministry of Finance bought the Japanese yen and sold US dollars in the foreign exchange market. This was the first time that Japan intervened in the Japanese yen exchange rate since June 1998. Adhering to monetary easing while interfering with exchange rates shows that the Japanese government is currently seeking a "internal and external balance." Japan's economy recovered slowly after the COVID-19 pandemic, Japan's GDP has not yet recovered to pre-epidemic levels, and CPI inflation continued to be above 2%, but was mainly driven by energy and food prices.
Therefore, insisting on loose monetary policy will help Japan's economy recover, but the monetary policy differentiation with major economies in Europe and the United States has put significant pressure on the yen exchange rate. The Japanese Ministry of Finance has intervened in the foreign exchange market again after 22 years, which may be a policy choice under the guidance of "internal and external balance".
Looking ahead to 2023, the risk of depreciation of the yen exchange rate remains.
First, As analyzed in the previous article, the US dollar index may continue to fluctuate at a high level in 2023, or even continue to rise.
Second, although Although Japan currently has abundant foreign exchange reserves (the end of August 2022 was US$1.3 trillion, equivalent to 180 trillion yen, and the market estimates that the scale of Japan's foreign exchange intervention on September 22, 2022 was around 3 trillion yen), judging from the experience of the Japanese government's intervention in the yen exchange rate, the effective time is usually 5-7 trading days (on October 6, 2022, the latest exchange rate of the US dollar against the yen was 144.58, which is close to the high before this intervention of 144.80).
If the Bank of Japan adheres to the yield curve control strategy, the yen exchange rate may still depreciate further when the US Treasury yield is still at a relatively high level and the Japanese government's foreign exchange market intervention effect is limited.
.4 Commodity
1, crude oil
Outlook In 2023, our benchmark forecast believes that the fluctuation center of international oil prices (Brent crude oil) is between US$80-90/barrel. There is a risk of oil prices recovering in winter 2022, and the downward trend after spring 2023 may be more obvious. The center of oil price fluctuations mainly depends on the balance of supply and demand, and the level of oil inventories is an important reference.
Historical data shows that there is a strong negative correlation between US crude oil inventories and WTI oil prices. At the end of September 2022, U.S. crude oil inventories fell to a low of nearly 20 years, but U.S. non-strategic reserve oil and product inventory has gradually rebounded since the second half of 2022, and has rebounded to the level of the fourth quarter of 2021 at the end of September 2022.
US petroleum product inventory rebounded, mainly driven by gasoline products.
In early October 2022 After OPEC+ announced the production cut, the US government quickly announced that it would place 10 million barrels of new strategic reserves in November, and new strategic reserves may be made in the future based on the oil price situation.
It is expected that the growth rate of global energy demand may remain stable in the next year or so, but there are multiple disturbances on the supply side:
First, On October 5, 2022, the OPEC+ ministerial meeting ended the offline meeting in Vienna. Saudi media quoted multiple sources as saying that all parties have reached a consensus on future crude oil production and will reduce production by 2 million barrels per day, which is equivalent to about 2% of global crude oil demand;
Second, Russian Vice Prime Minister Novak said in early October that Russia will produce 530 million tons of oil in 2022, and the annual output in 2023 will drop to 4.9 For 100 million tons, Russia will be ready to cut production to offset the impact of the EU's possible price cap on Russian oil.
Referring to the historical correlation between oil prices and inventory levels, it is expected that in the next year or so, the WTI crude oil price center will be between US$80-90/barrel, and the Brent crude oil price center may be between US$85-95/barrel.
rhythm, in the winter of 2022 and spring of 2023, oil prices have a risk of filling:
First, seasonal experience shows that the demand for energy in winter is significantly higher than that in summer.
For example, British natural gas consumption is usually twice as high as in summer. Normally, energy market pricing covers seasonal factors, but the special thing this year is that Europe's energy supply is more flexible, and summer energy supply is already "stretched", so it is hard to say that it can prepare for the rise in winter energy demand;
Second, international oil prices are significantly correlated with the prices of other energy products such as natural gas and electricity.
European natural gas and electricity prices fluctuate sharply in 2022. Starting from September 2022, with the EU introducing tough energy intervention measures, coupled with the market's concerns about the economic recession, European natural gas, electricity and other prices have all fallen significantly from highs, driving international oil prices to continue to pull back in mid-to-early September 2022. However, European energy policies may "treat the symptoms but not the root cause", and price control may not continue to work, and it is not ruled out that energy will become more scarce in winter 2022 and spring 2023 and the possibility of price controls becoming ineffective.
2, gold
The current gold price is in a period of pressure of "inflation easing + strong tightening", but it is difficult to weaken significantly due to the support of safe-haven demand.
Comparison of the "big stagflation" period in the United States in the 1980s, gold performed positively during the period of rising inflation, rising inflation expectations, and realization of economic recession, but when inflation fell and the Federal Reserve maintained tightening, it was under pressure.
is at the current node. If US inflation does not deteriorate significantly, the market's inflation expectations are expected to no longer rise, and the value of gold's "anti-inflation" will gradually weaken; at the same time, the Federal Reserve still has room for interest rate hikes and will not be suspended or reversed early, then the real interest rate of US bonds may further rise, putting additional suppression on gold prices.
But similar to the 1980s, the global economic and financial risks followed by "stagflation" continue to continue to play a certain risk aversion function, and prices may not weaken significantly. Gold prices may rebound when the US economic recession enters the middle and late stages.
In the second half of 1982, the US CPI inflation rate fell below 4%, the Federal Reserve continued to cut interest rates, and gold prices ushered in a significant rebound. Similarly, this round of gold prices may have to wait until the US economic recession is fulfilled, and the US inflation pressure is significantly alleviated, and the Federal Reserve will stop hike interest rates.
At that time, gold is expected to usher in multiple positives in the rise in safe-haven demand, the decline in real interest rates, and the decline in the US dollar index.
3, agricultural products
Russia-Ukraine conflict and extreme high temperature and drought weather have caused significant fluctuations in international food prices in 2022.
In mid-to-late June 2022, international grain prices experienced a rapid pullback. As of July 2022, CBOT soybean, corn and wheat futures prices all fell by more than 20% from June price highs.
In September 2022, the average prices of CBOT soybeans, corn and wheat were 1429, 677 and 863 cents per bushel, respectively, which rebounded by 4.6%, 13.2% and 6.3% from the average prices in July, respectively, higher than the average prices in December 2021 of 10.5%, 14.4% and 9.2% respectively.
Looking ahead about the next year, we believe that international grain prices will have insufficient momentum to rise again, and the fluctuation amplitude is also expected to narrow, and the fluctuation center may gradually return to the fourth quarter level of 2021. However, if oil prices rebound phased in winter, food prices may also rebound certainly.
Specifically, the CBOT soybean, corn and wheat futures price centers may fall back to around 1200, 600 and 800 cents per bushel in the first half of 2023.
On the one hand, the global agricultural product supply is highly resilient.
According to the latest forecast of the International Cereals Council (IGC) on September 22, 2022, compared with the forecast on June 23, 2022, the global cereal production was increased by 11 million tons in 2022/23, downgraded by 6 million tons in 2022/23, and also increased by 4 million tons in 2022/23. Compared with the June forecast, the overall supply and demand pattern in the September forecast continues to improve. It is expected that the gap in global cereal production and consumption in 2022/23 is less than 2% of the current global cereal inventory, which is in a relatively reasonable historical fluctuation range. In turn, the center of international grain price fluctuations should not be significantly higher than the level before the Russian-Ukrainian conflict.
On the other hand, the downward movement of the energy price center may drive the decline of grain prices.
Historical data shows that global food prices are highly correlated with international oil price trends. Food prices have a series of direct correlations with oil prices. For example, pesticides, fertilizers and other products in agricultural production come from fossil fuels, fuel is required for the production and operation of agricultural machinery, and biofuels and fossil fuels are also substituted.
Based on our prediction of the slow downward movement of the international oil price center, the pressure on rising international grain prices is expected to be alleviated. However, if international oil prices rebound phased in the winter of 2022 and spring of 2023, grain prices may also rebound certainly.
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selected report comes from [Fuanzhan Think Tank]
