KUALA LUMPUR (Jan 5): HSBC Global Private Banking sees silver linings in the Asian market in 2023, led by peaking US Federal Reserve (Fed) interest rates, a softening US dollar, and China’s improved recovery outlook.

According to Fan Cheuk Wan, the chief investment officer for Asia at HSBC Global Private Banking and Wealth, the resilient performance of the Asean economies in particular, which benefited from the global supply chain reorientation, stronger intra-regional trade and China’s economic reopening, are also factors supportive of the Asian market.

“Looking ahead into 2023, a crucial inflection point for the markets is the upcoming end of the Fed’s tightening cycle.

“The US CPI (consumer price index) inflation has fallen short of consensus estimates for two consecutive months in October and November, and the Fed moderated the pace of interest rate hikes to 50 basis points (bps) in December 2022,” she said at the 2023 HSBC Global Private Banking and Wealth Investment Outlook virtual media briefing on Thursday (Jan 5).

She expects a final 50 bps rate hike in February 2023, before the Fed pauses the tightening.

“Given sticky core services inflation, we expect the Fed to keep the peak rate at 4.875% throughout 2023, before it cuts its policy rate by 25 bps in 2Q2024 (the second quarter of 2024) and 25 bps in 3Q2024, bringing the federal funds target range back down to 4.25-4.50% by the end of 2024,” said Fan.

Fan added that Asia ex-Japan stands out as the only region projected to deliver gross domestic product growth acceleration to 4.3% in 2023, from 3.5% in 2022, driven by economic reopening in mainland China and Hong Kong, as well as solid growth in the Asean region.

HSBC holds an overweight position on Asian ex-Japan equities. It is overweight on mainland China, Hong Kong, Indonesia and Thailand to reflect their positive growth outlook for 2023.

James Cheo, the chief investment officer for Southeast Asia at HSBC Global Private Banking and Wealth, said that Asean’s resilient growth will continue to provide strong support for the Asian economy in 2023.

“Within the Asean equity markets, we are overweight on Indonesia and Thailand, as they have witnessed the strongest earnings momentum in the region.

“In Indonesia, robust domestic demand and elevated commodity prices continue to support strong investment and consumption growth. Thailand [meanwhile] will stand out as the only Asean economy projected to see growth acceleration to 3.8% in 2023 from 3.2% in 2022, thanks to continued benefits from the reviving tourism boom,” said Cheo.

He added that Thailand is also a geared beneficiary of China’s economic reopening, as it remains a top travel destination preferred by mainland Chinese tourists.

Despite 2022 having been a solid year for Malaysia's economy, recovering at a robust pace, HSBC keeps a "neutral" outlook on the Malaysian equity market, due to fewer positive catalysts to surprise investors on the upside, said Cheo.

“We are neutral on Malaysian equities. Malaysia has a high level of reliance on exports, and a slowdown in global growth poses risks to the equity market.

“Consensus earnings for Malaysia are expected to be healthy. The valuation of the equity market is trading below its historical average. Our preferred sectors for Malaysia will be on selected banks and consumer companies,” he said.

He added that Malaysia’s diversified export base has been robust, although some commodity prices have cooled.

“Looking into 2023, Malaysia's exports will likely slow down from the blistering pace in 2022. The good news is that Malaysia’s domestic demand is likely to remain robust and supportive of overall growth,” said Cheo.

He noted that a strong labour market, low unemployment rate and healthy wage growth in Malaysia would further support domestic consumption.

“Most of the high frequency indicators like retail sales have surpassed pre-pandemic levels, while the tourism sector should continue to improve in 2023. We expect Malaysia’s economy to moderate and grow by 4% in 2023,” he said.

He noted that Bank Negara Malaysia (BNM) will stay in the monetary tightening path a little longer to deal with core inflation that still remains high.

“BNM's policy calibration will be very much dependent on the next few inflation readings. Therefore, we expect BNM to stay on its tightening path a little longer, delivering another 75 bps in hikes in 1H2023 (the first half of 2023), thereafter taking a pause through 2024. With the peak of US dollar strength, we think that USD-MYR (the US dollar-to-ringgit exchange rate) could be at 4.35 by the end of 2023,” said Cheo.