SEA economies set to nosedive in 2023

According to JPMorgan analysts, Southeast Asian markets would behave like a “bungee leap” in 2023, first falling before rising in the second half of the year.

That’s likely to be characterized by a “sharp fall followed by a rapid increase in altitude (bear market rally) followed by another decline until eventually markets come to rest at rock-bottom,” analysts noted in a report. They attributed it to decreased purchasing power as a result of tighter monetary policy, smaller savings, and increased borrowing costs.

In the first half of 2023, JPMorgan predicts that the MSCI ASEAN Index will re-test this year’s lows and probably fall substantially lower, due in part to declining foreign demand, tightening financial conditions, and a “fading” reopening boost.

From its peak in February to its lowest point of the year in October, the MSCI ASEAN Index dropped 22%. Following that, the index rose 10% on expectations that China would reopen and a change in direction from the U.S. Federal Reserve.

The index tracks the performance of large- and mid-cap stocks in four emerging, one developed, and one frontier market. It has 170 constituent parts in all, distributed across Singapore, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.

A U.S. recession is anticipated for the end of the year, and Fed interest rates are anticipated to reach 5% by May.

But “contrary to investors’ belief, the equity market has failed to fully price in a recession until it happens,” the report said.

Trade-oriented nations with slower future global development and reduced demand for durable consumer products, such as Singapore, Thailand, Vietnam, and Malaysia, will be particularly impacted. Furthermore, it is unlikely that China’s anticipated loosening of Covid regulations will cancel out the predicted decline.

In Thailand, for instance, exports, private investments, and manufacturing are predicted to experience a “substantial decrease,” with JPMorgan analysts revising their prediction for 2023 GDP growth from 3.3% to 2.7%.

Singapore is anticipated to have macroeconomic conditions that are increasingly difficult. “We expect that the weakening in external demand will continue to slow [Singapore’s] goods producing sector even as the services sector provides some offset.”

JPMorgan analysts stated that the planned 8% increase in Singapore’s goods and services tax would have a negative impact on demand and consumer sector outlook.

The “reopening impulse” in China is also thought to be limited considering the current state of the world economy. Over the past week, mainland China has loosened several of its strict Covid regulations. National authorities have announced a number of significant modifications, including easing domestic travel restrictions, maintaining corporate operations, and allowing Covid patients to quarantine at home.

Recessions in developed markets will counteract the positive effects of China’s reform, and Southeast Asian markets are highly dependent on exports and demand from those nations.

However, if it happens, China’s reopening to foreign tourism would be a good catalyst for Singapore’s economy. Around 20% of all visitors to Singapore in 2019 were Chinese, and their subsequent return could create knock-on repercussions for [Singapore’s] consumption and travel-related services sector.

However, JPMorgan predicts that the improvement would still likely be constrained by the country’s issues with external demand and the aforementioned global recessionary conditions.

According to the paper, a complete reopening of China’s border would also have “potential upside” for Thailand’s tourism rebound and could have inflationary effects.

“There is an argument that China’s earlier-than-expected border reopening is inflationary,” JPMorgan said. However, the experts noted that while tourism may boost consumption and wage growth, it is not strongly connected with inflation in nations like Thailand, where inflation is mostly supply-driven.