Skip to main content
logo
  • Funds

    Fund Listing

    • Fund Explorer
    • Fund Distribution
    • Fund Documents

    Capabilities

    • Equities
    • Fixed Income
    • Multi-asset

    Featured Funds

    • Income Solutions
    • Sustainable Infrastructure Fund
    • Future Transition Multi-Asset Fund
    • Provident Fund
  • Insights

    Market Insights

    • Market Insights Overview
    • Guide to the Markets
    • Weekly Market Recap
    • On the Minds of Investors
    • Guide to China
    • Multimedia

    Retirement Insights

    • Retirement Insights Overview
    • Principles for a Successful Retirement
    • Building Better Retirement Portfolios
    • Are you letting volatility derail your retirement plan?
  • Investment Ideas
    • What's new
    • Managing Volatility
    • Retirement and long-term investing
    • Sustainable Investing
  • Personal Investing

    Knowing the Basics

    • Mutual Funds 101
    • Taking the First Step in Investing
    • Ways to Diversify Your Portfolio
    • Investing for Your Children’s Future
    • Retirement Planning

    Getting Started

    • Start Investing
    • Investment Ideas
    • Invest regularly: Monthly Fund Investment
    • eTrading Privileges
    • Open an Account Online with Ease
  • Retirement Services
    • ORSO Services
    • MPF Services
    • Retirement Fund Centre
  • Resources
    • About Us
    • Awards
    • Contact Us
    • Announcements
    • Forms & Literature
    • Investment Return Calculator
    • Insights App
    • JPM Bot
    • FAQ
  • Library
  • Language
    • English
    • 中文/ Chinese
  • Role
  • Country
  • eTrading Login
    Open an Account
    Search
    Search
    Menu
    You are about to leave the site Close
    J.P. Morgan Asset Management’s website and/or mobile terms, privacy and security policies don't apply to the site or app you're about to visit. Please review its terms, privacy and security policies to see how they apply to you. J.P. Morgan Asset Management isn’t responsible for (and doesn't provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the J.P. Morgan Asset Management name.
    CONTINUE Go Back
    1. Who will ride out the DM turbulence best?

    • LinkedIn Twitter Facebook

    Who will ride out the DM turbulence best?

    24/08/2022

    Ian Hui

    Adrian Tong

    Jennifer Qiu

    In brief

    • Recession warnings from the U.S. and Europe threaten to derail Asian economies’ nascent recovery, mainly through a drag on export demand.
    • Levels of export exposure to the U.S. vary greatly among Asian economies, but they have generally come down in the past two decades, while export dependence on China has increased. Asian trade growth is coming from within the region rather than outside it.
    • Countries such as Vietnam, which has higher export exposure to the U.S. and is more sensitive to the U.S. consumer, is likely to be harmed more by a U.S. slowdown. Meanwhile, Indonesia, with its higher dependence on domestic consumption, looks more insulated against external shocks.

    With recession risks heightening in the U.S. and Europe, some investors have turned to Asia, eagerly hoping to find outperforming stocks, especially since Asian equities have performed relatively well in H1 2022 in the face of global shocks. Indeed, the Russia-Ukraine crisis had relatively less direct impact on most Asian economies, given limited trade relationships with Russia (only around 1.5% of Asian exports go to Russia) as well as low reliance on natural gas and wheat. Asia also initially saw fewer signs of overheating, so central banks could afford more gradual rate hikes. However, as various headwinds erode global demand, APAC is not insulated. Specifically, emerging Asia’s quarter-over-quarter (q/q) GDP contracted for the first time since 4Q20 (Exhibit 1).



    Source: FactSet, MSCI, J.P. Morgan Asset Management.
    Data reflect most recently available as of 10/08/2022.

    Although Asia is regarded as one region, it’s worth reminding ourselves that there are plenty of idiosyncrasies within, which bring forth less synchronized recovery paths. For example, just within emerging Asia, Laos hit a 22-year high inflation print of 23.6%, while Malaysia’s inflation in June was only 3.4%.

    While a global recession is not in our base case, we think there will be a significant slowdown at the very least. Risks are currently higher in developed markets, with Europe more vulnerable than the U.S. given the energy crisis. Thus, we will try to examine Asian economies’ external and domestic demand exposures to understand who are better positioned to ride out any contagion from the West.

    Where do Asian exports go?

    Exports are a key driver of Asian economies and they move fairly in tandem with APAC earnings (Exhibit 2). With most Asian exports being goods, there are high contagion risks from weaker external goods demand. In April, the World Trade Organization revised down the 2022 global trade growth forecasts from 4.7% to 3.0%, with 2023 growth inching up to only 3.4%. As Asian countries are just emerging from COVID-19 lockdowns, slowing trade seems to be a threat to turn the region’s recent economic growth on its head.

    EXHIBIT 2: EARNINGS PER SHARE IN ASIA CLOSELY TRACK NOMINAL EXPORT GROWTH
    USD, YEAR-OVER-YEAR CHANGE


    Source: CEIC, national statistics agencies, J.P. Morgan Asset Management.
    EM Asia ex-China includes Hong Kong, Korea, Malaysia, Singapore, Taiwan, Thailand and Vietnam. Overall exports aggregate is GDP-weighted.
    Data reflect most recently available as of 10/08/2022.

    But the picture is much more nuanced than that. Taking exports to the U.S. as an example (Exhibit 3), there are significant discrepancies among Asian countries. Apart from Vietnam, other economies only export 10% or less of GDP to the U.S. Compared with the past two recessions, export exposure has significantly come down, again, with Vietnam being an exception, partly due to supply chain reshuffling in the region, which saw some companies moving production from China to Vietnam. Having said that, we are still very far from decoupled, as the U.S. continues to be a key driver of economic activity and growth in Asia beyond exports.

    EXHIBIT 3: ASIAN ECONOMIES’ EXPORT EXPOSURE TO THE U.S. HAS DECREASED OVER TIME
    VALUE OF EXPORTS TO THE U.S. AS A PERCENTAGE OF NOMINAL GDP, USD


    Source: FactSet, IMF, Oxford Economics, J.P. Morgan Asset Management.
    Data reflect most recently available as of 10/08/2022.

    On the contrary, export exposure to China has increased significantly over time (Exhibit 4), with a caveat that part of these exports are for processing in China only and ultimately consumed by Western consumers. China retail sales rebounded after recent lockdowns, beating expectations by rising 3.1% year-over-year in June 2022, while red-hot inflation and rising borrowing costs are eroding consumer confidence in the U.S. and Europe. However, given the onshore risks in China regarding COVID-19 policy and the property market, it is still highly uncertain whether Asian economies can rely on China to boost their tourism and exports in the near term.

    Beyond China, there has also been strengthened regional trade and value chain linkages among Asian economies. Intraregional trade now takes up around 25% of ASEAN’s total trade and countries like South Korea are seeing significantly higher export growth to ASEAN than to other regions, including to China. Stronger regionalization and economic integration will be key to a resilient recovery.

    EXHIBIT 4: ASIAN ECONOMIES’ EXPORT EXPOSURE TO CHINA HAS INCREASED OVER TIME
    VALUE OF EXPORTS TO CHINA AS A PERCENTAGE OF NOMINAL GDP, USD


    Source: FactSet, IMF, Oxford Economics, J.P. Morgan Asset Management.
    Data reflect most recently available as of 10/08/2022.

    Apart from the level of export exposure, we also looked at the sensitivity of Asian exports to U.S. economic activity. In fact, Asian exports are still fairly highly correlated with both U.S. investments and retail sales, with the former being more of a leading indicator while the latter is relatively concurrent. However, the sensitivity varies across economies, suggesting that the extent of contagion risks to each country also depends on the type of U.S. recession that unfolds. Exhibits 5 and 6 plot export exposure against the sensitivity to U.S. investments and retail sales. Economies closer to the upper-right quadrant of the scatter plot would be most at risk. Exhibit 5 shows that an investment-led recession in the U.S. would likely impact South Korea and Japan more, due to larger exports of capital goods such as machinery, vehicles, equipment etc., but we’re less concerned because export exposure as a percentage of GDP is still considerably low. Looking at Exhibit 6, consumer goods exporters Thailand, Malaysia and especially Vietnam have relatively high export exposures and correlations with U.S. retail sales. Current weakness observed in the U.S. economy is mainly concentrated on the consumption side rather than investments. Thus, these countries that export cheaper consumer products are more vulnerable.

    EXHIBIT 5: CORRELATION WITH U.S. CORPORATE INVESTMENTS SINCE 2010
    EXPORTS TO THE U.S. AS % OF GDP, CORRELATION BETWEEN QUARTERLY YEAR-OVER-YEAR CHANGES IN EXPORTS AND U.S. PRIVATE DOMESTIC NON-RESIDENTIAL INVESTMENTS (INVESTMENTS LEADING EXPORTS BY 2 QUARTERS)

    EXHIBIT 6: CORRELATION WITH U.S. RETAIL SALES SINCE 2010
    EXPORTS TO THE U.S. AS % OF GDP, CORRELATION BETWEEN QUARTERLY YEAR-OVER-YEAR CHANGES IN EXPORTS AND IN U.S. RETAIL SALES


    Source: FactSet, IMF, Oxford Economics, J.P. Morgan Asset Management.
    Data reflect most recently available as of 10/08/2022.

    Turning inward

    For a sustained recovery, domestic demand would be an important buffer to counter the drag on exports. With the recent re-openings, we can expect Asian domestic demand to follow a similar recovery path to the U.S. and Europe, with an initial pick-up in goods demand, followed by a more sustained recovery in services such as F&B and transport. The rebound in tourism has been impressive so far, but with slowing growth in the U.S. and Europe, countries with larger existing domestic or regional tourism, rather than relying on inbound visitors, will likely stay more resilient. Although the initial rebound in domestic consumption data is affected by a low base, pent-up demand does take considerable time to be fully unleashed, as we’ve witnessed in the West.

    Indonesia, the largest economy in Southeast Asia, both in population and economic size, has its MSCI constituents derive 91% of revenue domestically, with a total of 97% from Asia (Exhibit 7). Naturally, it is also one of the least export-oriented countries (Exhibit 3 and 4), relatively insulated from external contagion risks. Other ASEAN countries like the Philippines and Thailand also rely a lot on domestic demand and have more diverse sector weights in their indices. If the strength in domestic mobility, retail sales and consumer confidence persists, coupled with the accelerated vaccine rollouts and government stimulus that we’ve seen so far, domestically oriented Asian economies will likely be more supported. It is also worth remembering that while Asian export growth explains the ups and downs of earnings volatility in Asia (Exhibit 2), domestic structural growth is still a significant long-term driver and much more consistent over time.

    EXHIBIT 7: INDONESIA HAS THE LARGEST DOMESTIC REVENUE EXPOSURE
    GEOGRAPHIC REVENUE EXPOSURE OF MSCI INDICES


    Source: FactSet, MSCI, J.P. Morgan Asset Management.
    Data reflect most recently available as of 10/08/2022.

    Conclusion and investment implication

    With the downside risks to global growth, Asia’s recovery will slow, but we don’t think it will be derailed, especially with Asia’s decreasing export exposure to the West. Also, even with the borders of the largest economy in the region being closed for the past few quarters, Asia ex-China was able to bolster an impressive recovery so far by relying on intraregional trade and domestic consumption.

    Looking at individual countries’ economic reliance externally and domestically, the speed and breadth of recovery will be far from consistent if there is a Western recession. Within the region, we think Vietnam will likely be hard hit due to its high and increasing export exposure to the U.S., followed by Thailand and Malaysia. In the case of an investment-led recession, countries like South Korea and Japan will be impacted more due to their high sensitivity to U.S. investments. On the flip side, we think larger economies with higher reliance on domestic activity will likely be more resilient, such as Indonesia, Philippines and India. Country diversification is still important, as we still see idiosyncratic risks that could derail recovery for individual countries, such as vaccine rollouts, government policies, inflation and so on.

    Beyond country selection, active sector and stock selection are especially important considering Asian companies’ varying degrees of exposure to exports and domestic consumption. Other factors such as cyclicality, given the early economic stage, as well a pricing power, to protect margins in periods of inflation, are also important.

    09ce222308091141

    The Market Insights program provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support investment decision-making, the program explores the implications of current economic data and changing market conditions. 

    For the purposes of MiFID II, the JPM Market Insights and Portfolio Insights programs are marketing communications and are not in scope for any MiFID II / MiFIR requirements specifically related to investment research. Furthermore, the J.P. Morgan Asset Management Market Insights and Portfolio Insights programs, as non-independent research, have not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research.

    This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

    J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.

    To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://am.jpmorgan.com/global/privacy.

    This communication is issued by the following entities:

    In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be. In Canada, for institutional clients’ use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan) Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919). For all other markets in APAC, to intended recipients only.

    For U.S. only: If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance.

    Copyright 2023 JPMorgan Chase & Co. All rights reserved.

    J.P. Morgan Asset Management

    • Terms of Use
    • Privacy Statement
    • Cookies Policy
    • Investment Stewardship
    • Fund Notes
    • Offering Document(s)
    • Forms & Literature
    • Complaint Resolution
    • Guide to Using This Website
    • Sitemap
    • Download Insights App

    J.P. Morgan

    • J.P. Morgan
    • JPMorgan Chase
    • Chase

    The information contained herein is intended only for use by Hong Kong residents. By using this information, you are representing and warranting that you are either residing in Hong Kong or the applicable laws and regulations of your jurisdiction allow you to access the information, and you confirm that you accept the Terms of Use as set out in https://am.jpmorgan.com/hk/. Investment involves risk. Past performance is not indicative of future performance. In particular, funds which are invested in emerging markets and smaller companies may involve a higher degree of risk and are usually more sensitive to price movements. Investors should carefully read and consider the fund offering document(s), which contain details on investment objectives, risk factors, charges and expenses of the fund, before making any investment decisions. Investors should read carefully the fund notes before making any investment decisions. Information in this website does not constitute investment advice, or an offer to sell, or a solicitation of an offer to buy any security, investment product or service, nor a distribution of information for any such purpose. Opinions and statements of financial market trends set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. Investors should conduct their own verification. The views and strategies described may not be suitable for all investors. This website and the advertisements contained herein are issued by JPMorgan Funds (Asia) Limited. This website has not been reviewed by the Securities and Futures Commission of Hong Kong ("SFC"), with the exception of material relating to the JPMorgan Provident Plan that the SFC has pre-approved (however such pre-approval does not imply official recommendation by the SFC).

    Apple, the Apple logo, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc.

    Copyright 2023 JPMorgan Funds (Asia) Limited. All rights reserved.