Four reasons to expect further gains in EM Asia’s stock markets to be relatively small – CE

Having been among the best performers during the earlier stages of the pandemic, emerging market (EM) Asian equities have taken a bit of a breather this year. Economists at Capital Economics don’t think stock markets in emerging Asia will come roaring back to life any time soon and forecast relatively small increases in equity indices there over the next few years.

Gains in EM Asian stock markets to remain small

“We think the rotation trade has more room to run. As economies continue to reopen and investors increasingly factor in a return to normal, we think IT stocks, in particular, will continue to perform relatively poorly.”

“While demand for semiconductors may support earnings for a while, we suspect any further boosts to equity indices from this will be relatively small. Significant growth in earnings in the sector now already appears to be discounted. Additionally, the shortage of semiconductors has led the US, and others, to attempt to boost domestic production, which could eventually eat into the earnings of East Asian producers. And finally, many companies in the region use semiconductors as an input, the rise in prices of which has put upward pressure on their costs, and therefore limited any boost to the overall market.”

“We forecast growth in China to be weaker than most expect over the next couple of years. And China’s stock market also faces risks, in our view, from financial decoupling with the US, the country’s continuing anti-trust push, and the move by authorities to reduce implicit government guarantees in China’s credit markets.”

“We expect the rise in US real yields to resume as the global economic recovery continues.”

“We forecast the MSCI EM Asia Index to finish this year at 1,225, not too far from its current level of ~1,170. And we project similarly small gains over the following couple of years as well.”