From : Making Sense


Market Matters | Data Assets & Alpha Group: assessing risk / reward for Asian equities post a modest pullback




Eloise: Hi, I'm Eloise Goulder, head of the Data Assets & Alpha Group here at J.P. Morgan.  And today I'm delighted to be joined by Krupa Patel, who runs the International Market Intelligence team, to really dive into Asian equities. So Krupa – thank you so much for being here once again! 


Krupa: It's a pleasure, thank you for having me again Eloise,


Eloise: So, Krupa – let’s start with some context on Asia.  Asia really was the bright spot in terms of equity performance from October through to late January this year – as global markets really began to rally from their troughs.  Asian markets like MSCI Asia were up a full 27% over that 4 month period from October last year, and MSCI China up almost 60% over that period, and this compares to US equities only up a maximum of 16% from those October lows.  And I think it’s fair to say that Asian equity outperformance over that period - or at least the outperformance in China – has been fueled by investor optimism around Chinese authorities relaxing Covid restrictions and re-opening the economy. But then turning to recent weeks – basically through February – Asian equities have given back some of those gains. MSCI Asia is down about 6% from peaks in late January.  Which begs the question ‘are there risks afoot which we need to consider’… or, if not ‘isn’t this a great re-entry opportunity into Asian equities, and a tactical pullback that we really want to take advantage of. So Krupa – can we start with that question: ie where next - and let’s hone in on China for the time being. 


Krupa: Sure, so yes, I’m in the camp that China will come back as the “bright spot” in this market and that the February weakness that we saw is a pullback to take advantage of.  So why am I bullish? Well, because of a combination of potentially easing geopolitical tensions and hopes of a growth inflection which I think should drive global investors, who played the last leg of China’s rally largely through international proxies like European luxury goods and commodities, to slowly but surely add exposure to the region directly. And the positive macro data releases last week from China, notably the PMIs and property sales data, may help boost this optimism further as they did indicate a broad based improvement in economic activity in the economy. Further, hopes of a continued rebound may also be boosted by the slew of reforms announced by the government in Beijing last week, ahead of the ongoing NPC meeting, which does tend to be the most important policy event of the year in China. Now from our side in International Market Intelligence, we have been tactically cautious on Chinese markets in the last month or so in line with our Signal from the Noise framework which gave out a more cautious signal on the CSI300 (and in fact all global markets) in early February – which I know Eloise you have discussed on prior podcasts.  The fact that you’d had some segments of the Chinese markets rebound by 45-55% from their lows in October, and the recent flare up you’d seen in geopolitical tensions with the US, they both indicated a potential pause in the region’s rally in January. Having said this though, in line with our equity strategist Wendy Liu in Hong Kong, we had continued to argue that the recent profit taking in China was more likely a bull market correction rather than a resumption of the bear market we’d seen in China up until October last year. Now it’s worth noting that our signals are starting to get incrementally more constructive on Chinese equities recently, with the Fundamentals component showing some signs of improvement last week after the manufacturing PMI posted the biggest rise in over a decade. And this time, it is possible that the rebound that we see in China is potentially more potent. As we see the more domestic segment of the Chinese market and the A-shares participate in the rally as well, as the biggest beneficiary of the re-opening driven rally in Q4 last year were the H-shares.


Eloise:  Thanks Krupa – that’s really helpful context on the reasons why Chinese markets have pulled back a little bit, and also why you’re getting increasingly more optimistic at this stage.  So, now can we turn to Japan which has also been a key area of focus in the region, particularly after the Bank of Japan widened its YCC ranges in mid December last year – and so became incrementally less accommodative. We also have the new Bank of Japan governor now appointed.  And since early December, the Japanese Nikkei index has been on a bit of a rollercoaster ride, I’d say – it nose-dived in December but then it’s rallied back  over the last couple of months.  So, Krupa, how do you suggest investors navigate Japanese equities at this stage?


Krupa: Sure, so as you correctly mentioned, Japan has indeed been through a bit of a rollercoaster on its monetary policy in the last 3 months. After the Bank of Japan unexpectedly widened its YCC ranges at the December 19th meeting, market expectations of an abandonment of its YCC policy by early/mid 2023 rose significantly, and that drove a sharp sell off in the Nikkei and also an appreciation in the yen up 227 vs the dollar at the highs in mid January. In recent weeks however, these hawkish policy expectations have been tempered post the nomination of Kazuo Ueda as the new Bank of Japan governor who is actually in favour of maintaining Japan’s accommodative monetary policy stance as he believes that although inflation is rising strongly, it is still likely to remain below the Bank of Japan’s 2% target by some distance. As a consequence, at its policy meeting later this Friday, the Bank of Japan is now widely expected to make no changes to its YCC policy, even though it will be the outgoing, more hawkish, governor Kuroda’s last meeting before he officially steps down. So I guess the question now is do the recent developments on the Bank of Japan policy front mean that we are now looking at Japanese yields staying lower for longer? Not really, argue our economists. In sharp contrast to the incoming governor Ueda’s recent communications, our economists actually see YCC removal taking place around the middle of this year, with a risk of it happening sooner if demand-side pressures on inflation grew further in the coming weeks and months. They are also forecasting an eventual exit from the negative interest rates – so NIRP policy that Japan has had for a little while – by the end of next year. Now with inflationary pressures fast rising in Japan, and other DM central banks staying firmly hawkish, the Bank of Japan continues to face a difficulty in terms of keeping the current YCC while maintaining market functionality. Even after the expansion of the fund-supplying operations against pooled collateral in January after the December 2022 widening of the 10Y YCC band, the Bank of Japan has been forced to purchase large amounts of JGBs. The February Bank of Japan bond market survey released just a couple of days ago showed a further deterioration in market functioning, with the bond market functioning DI falling 13 pts from the previous November 2022 survey to -64, which actually was a renewed low since the survey began in 2015. So what does all this mean for Japanese equities is the key question here? Given that the Bank of Japan is widely expected to stay accommodative later this week, I think it may well be that the recent stabilization we’ve seen in the equity market in Japan continue to be supported for a little while longer. And indeed, it’s worth noting that our Signal from the Noise framework for Japan – which is tactical in nature with an avg holding period of 6 days - is currently pretty bullish as well. Over the longer-term too, I think Japan remains an attractive destination for global equity investors, a view that our chief Japanese equity strategist in research Rie Nishihara shares as well. At the end of the day, the Japanese economy is exiting from its decades long deflationary environment and shifting to an environment in which interest rates rise, even moderately. Even if the Bank of Japan not only modifies its YCC policy but also removes it completely and also gets rid of the negative interest rate policy it’s held for a while. We think that the impact on the Yen could actually be pretty manageable and corporate earnings could manage to stomach it. Plus Japan continues to trade at a significant discount to its long run average valuations since the 1990s.  But the difficult factor for equity investors, is between the very short term and the long term, there could potentially be a choppy path for Japanese equities as they factor in that final YCC abandonment announcement, which could come at any stage once Ueda is in place in the Bank of Japan.


Eloise: Thanks Krupa – so that’s a relatively more bullish picture that you’ve just painted for China and Japan, albeit for quite different reasons in both markets. And of course, as you say, the Japanese path higher could be somewhat choppy. But, can we finally just turn to Europe.  On a YTD basis, it’s actually Europe – rather than Asia or the Americas – which has been the leading, or the outperforming, equity region. And I think European market strength, and resilience, has surprised many – including ourselves.  So, Krupa, if you’re right about Asia having another leg higher from here – how do you think Europe fares in this context? Do global investors potentially now rotate out of Europe and into Asia?


Krupa: Not necessarily, as if China rebound strongly from here, Europe will inevitably benefit from this as well given its high exposure to the Chinese economy. Now, our Signal from the Noise framework has also recently turned incrementally more bullish on European equities – the framework was cautious on the region throughout February (along with cautiousness for most regions as I had alluded to earlier), but it is now in – let’s call it - ‘weak buy’ territory.  So I’m no longer cautious on European equities. But I do think that in this next leg higher for China, perhaps the Chinese domestic segment, could finally outperform Europe.


Eloise: Great, thank you Krupa. So, if I briefly sum-up, then.  Asian equities have been a bright spot in the global economy since they troughed in October last year. MSCI Asia, for example, is up over 20% since then, and so it’s comfortably outperforming the US.  But having said that, Asian markets including China have given back a chunk of those gains through February.  So, looking forward, Krupa you’re relatively bullish on both China and Japanese equities: China is finally seeing a slew of better macro releases including PMIs and property sales data - and so Krupa, you’d use China market weakness through February as a good opportunity to re-enter.  And Japan, on the other hand, should ultimately benefit from an exit to its deflationary cycle – and the return to modest inflation – but as you say, it could be a choppy path given that YCC abandonment (so, ultimately a hawkish surprise) could be announced at some stage.  And then finally, Krupa you’re also incrementally bullish on Europe given better macro data in the region like PMIs and slightly better micro data like earnings revisions, even if these data points are coming from a low base.  And Krupa. you note that our Signal from the Noise framework is incrementally more supportive of all 3 of these regions over the last week or so.  So Krupa – a remarkably bullish take from you today!


Krupa: Thanks, Eloise. Well I think you summed it up well – and yes, I guess I am tactically more bullish today than I have been on prior podcasts!


Eloise: Well, thank you once again Krupa, for sharing your views on markets today.


Krupa: Thank you. It was great to be here again.


Eloise: Thank you also to our listeners for tuning in to this bi-weekly podcast from our group.  We’d love to hear feedback on our content and to hear about other topics you’d like covered.  So if you do have that feedback, or questions, or you’d like to explore our wider team content further – then please do go to our website at – and there you can send us a message via the ‘Contact us’ form. And with that – we’ll close. Thank you!





In this episode, the DAA Group dive into Asian markets, focusing on the extent to which Chinese equities are still benefitting from re-opening tailwinds, and how Japanese equities could fare in the context of the new Bank of Japan Governor.


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