JP Morgan expects bungee jump trajectory for Asean equities next year

by S BIRRUNTHA / pic BLOOMBERG

THE Southeast Asia equity markets’ trajectory may just go the way of a bungee jump next year, says JP Morgan.

“2023 may bring several challenges for Southeast Asia equity markets, based on our assessment, owing to tightening financial conditions, weaker external demand, fading reopening boost and election cycle,” it said in a recent report on its Asean outlook for 2023.

“We anticipate the market trajectory much like a bungee jump: post rebound from recent low on hopes of Fed pivot, soft landing and China reopening, it will price in a global growth forecast below trend, as Fed funds rate will reach 5% and a US recession is expected in end-2023,” it said.

During previous periods of global GDP below trend and declining, it said AseaN equities’ average quarterly return is negative 4.7%, with staples, utilities and healthcare the best-performing sectors.

“Despite correction leading up to recession, Asean markets tend to decline for several months in a recession and only do well 12-18 months after the recession ends,” it said.

JP Morgani noted that the bigger concern is that the 2023 consensus earnings forecasts remain high even with negative revisions so far.  

It said weaker demand for durable consumer goods are already significantly impacting technology hardware producers.  

“Weaker demand for durable consumer goods is already significantly impacting technology hardware producers. The lagged effect of monetary policy tightening suggests further cuts in revenue growth next year due to lower domestic demand and pricing. Lower savings and rising cost of borrowing will impact purchasing power. China reopening impulse is expected to be modest given global recessionary conditions, in our view,” it said.

On Malaysia, it said its targets for FTSE Bursa Malaysia KLCI in 2023 is 1,500 for base case and 1,650/1,300 for bull/bear case. On its sector allocation, it is overweight on consumer staples, consumer discretionary, materials, and industrials and underweight on real estate, communication services, healthcare and utilities.

On equities in Malaysia, it said though Malaysia is a consensus underweight market, downside risk remains given heavy reliance on trade amid a global recession.

On sector positioning, it said it continues to like the plantation sector given that potential crude palm oil (CPO) price recovery might offer upside dividend yield to investors. Defensive blue-chips or export-oriented names with low government exposure are also preferred.