Is Asia’s bull market over? Strategists say there’s room for stocks to rally further

As Asian stocks entered a bull market in January, the benchmark index for the region began to fall more than 5% from its peak.

The region’s rally – fueled by China’s reopening – appears to be hitting a wall, but economists say MSCI’s largest index of Asia-Pacific shares outside Japan has more room to run.

Nomura Asia-Pacific equity strategist Chethan Seth said the firm expects the index to be at the 700 level by the end of this year – which is 8% higher than the current level on Wednesday.

“We think Asian stock valuations are still modest,” Seth said, pointing to the region’s price-to-earnings ratio of 12.9 despite the rally — versus the U.S. market’s 18.5.

Seth added that China’s economic and income recovery will provide further support as well as fundamental recovery for technology, memory chips and semiconductors in the second half of this year.

He said recent US data showed uncertainty ahead for inflation and economic growth.

“In the near term, Asian stocks will not be happy with this uncertainty and thus we expect some short-term volatility until the data trends re-form,” he said.

JPMorgan also expects the MSCI Asia-Pacific ex-Japan index to reach the 700 level this year.

“After the current period of consolidation, we expect MXASJ to test our bullish target for 2023 in 2Q2023,” said Wendy Liu, JPMorgan’s head of Asia and China equity strategy.

“MXASJ may fall [or] consolidate in 3Q on macro resilience concerns before recovering at the end of 2023 for a synchronized recovery of global growth in 2024,” said Liu.

Recession fears for the eurozone and the US after global central banks aggressively raised rates to curb inflation. Uncertainty about China’s shift away from its zero-Covid policy also continues to linger.

“This uncertainty is more likely to dampen rather than undermine the structural positive forces we see in the Asian economy,” said Minyue Liu, BNP Paribas investment specialist for Asian and global emerging market equities, adding that these factors will only cause volatility in the short term.

“Moderate valuations, light investor positions and sound fundamentals are buffers that should help Asian stocks withstand short-term volatility,” BNP’s Liu said.

He added that domestic demand in the region would be a “driver of economic growth,” and he expected trade volumes to recover with the reopening of the Chinese market.

China’s policies will continue to be a key factor in driving Asia-Pacific stock growth.

CMC Markets analyst Tina Teng said the latest decline in Asia-Pacific shares could be due to investors eager to reopen China.

“The decline of the Asian market in February may have been caused by a technical correction after months of rally because the market was overbought when China started a U-turn on the Covid-zero policy, which led to a rebound in optimism before seeing the promise of the country’s economic recovery,” he said.

“I still expect Asian stock markets to outperform their US peers after a short-term correction on China’s reopening in 2023,” he said.

Credit Suisse chief investment officer John Woods said onshore Chinese investors could be a key factor in driving the rally further.

“One missing piece of China’s equity rally so far has been the low participation by onshore investors, which is expected to reverse as data – and confidence – improves,” he wrote in a note.

“We anticipate macro momentum to extend well into Q2, which should give more legs to the rally in equities,” he said.