Asian stocks were muted on the first trading day of 2024 as worries over China’s economic outlook persisted. While some investors are positioning for China’s eventual reopening and recovery, fresh signs of weakness in the world’s second-largest economy capped gains across the region.
China Stocks Retreat As Economic Woes Continue
Chinese shares fell on Tuesday, starting the new year on a weak note amid ongoing concerns over the health of the domestic economy [1]. The CSI 300 index dropped 0.5% while the Shanghai Composite lost 0.4%.
Data released over the weekend showed China’s factory activity shrank for the third straight month in December. The official manufacturing purchasing managers’ index came in at 47.0 in December, below the 50-point mark separating growth from contraction [2].
The weak data highlights the economic toll from China’s zero-COVID policy and sluggish domestic demand. However, some investors believe the worst may be over for China.
“We actually are far more constructive about China now, simply because a lot of the negativity has been priced in,” said Sat Duhra, Asia equities portfolio manager at Janus Henderson Investors.
Japan, South Korea Edge Up; Australia Declines
Elsewhere, Japan’s Nikkei 225 rose 0.2% while South Korea’s Kospi index added 0.3%. Australian stocks opened lower, with the S&P/ASX 200 index down 0.2% [3].
Trading volumes were thinner with some major markets like Hong Kong still closed for the New Year holidays. Investors were also cautious ahead of key economic data due this week.
Manufacturing PMIs from China, Japan, South Korea, and Taiwan will provide the next important indicator of how regional economies are faring. The Caixin China PMI reading on Wednesday will garner special attention after the disappointing official PMI data.
Central bank meetings in Australia and India will also set the tone for interest rates and currency movements this week. The Reserve Bank of Australia decides policy Tuesday, with markets betting on a quarter-point hike to contain inflation.
2023 Was Disappointing Year For Asian Stocks
Asian equities turned in a lackluster performance in 2023 as China’s economic woes, aggressive Fed tightening, and geopolitical tensions took a toll [4]. The MSCI Asia Pacific Index declined nearly 18% over the year.
| Index | 2023 Returns |
|---|---|
| China CSI 300 | -22% |
| Japan Nikkei 225 | -3% |
| Hong Kong Hang Seng | -15% |
| South Korea Kospi | -25% |
| India Nifty 50 | +5% |
Data Source: Investing.com
China was the worst performing Asian market last year, as lockdowns and the property sector downturn dragged on growth. South Korea’s heavy exposure to semiconductors also led to sharp declines.
India was a rare bright spot, bucking the regional downtrend on solid domestic demand and growth. However, Indian stocks corrected nearly 10% from all-time highs toward the end of 2022.
Hopes Of China Reopening, Rate Cuts Support Asia Outlook
Despite the muted start, investors remain constructive on Asia’s prospects in 2024. Positioning for an eventual economic rebound in China will be a major theme this year.
“China is going to have more difficulty in the first half of 2023, but confidence is high that in the second half, China is going to start relaxing COVID policies meaningfully,” said Sat Duhra of Janus Henderson Investors [5].
Easing inflation is also allowing Asian central banks to shift toward policy easing. Analysts predict interest rates cuts across most regional economies in 2024 [6]. This should provide a better backdrop for equities after last year’s sharp rate hikes.
Other key events investors are watching include Taiwan’s presidential election in 2024 and Indonesia’s potential move to shift its capital from Jakarta to East Kalimantan [7].
Major risks that could upset the outlook include a resurgence in Fed hawkishness if US inflation fails to moderate. Geopolitical tensions around Taiwan and the Korean peninsula also continue to lurk as tail risks for markets.
Overall, analysts see Asia returning to the spotlight in 2024 as China emerges from its downturn and the region’s central banks adopt looser monetary policy. With depressed valuations from last year’s sell-off, Asian equities seem positioned for gains if the macro backdrop stabilizes as expected.
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