Asia has begun trading more with its neighbors and allies, like Latin America and Africa, compared to 20 years ago. This provides evidence that globalization is not disappearing, but alliances between certain countries are strengthening.

Trade relationships have changed dramatically due to the onset of U.S.-China trade tensions in 2018 and the impact of the pandemic. Companies are more aware of supply chain risks, resulting in a larger number of companies moving production out of China.

Despite greater trade tensions with the U.S., China’s share in global trade has not decreased. It is now trading more with neighbors such as Australia and ASEAN, as shown in the graph on the left.

China has experienced high GDP growth since the 1980s due to strong residential investment and consumption. However, growth has been more volatile in recent years, primarily due to the economic downturn following the pandemic and weakness in the real estate sector.

Household deposits have been rising while household loans, which include mortgages and other consumer loans, have been falling. Since 2020/2021, consumers have exhibited a higher willingness to save and a lower propensity to consume given a weak labor market, decline in property prices, and limited wage growth.

Sentiment indices have moved lower partly due to the downturn in the real estate market, one of the most important sectors in China’s economy and a key source of household wealth. Lower home prices have contributed to a negative wealth effect.

Due to the economic downturn, the government has been forced to spend more on stimulus and other programs. For the past three years, government bond issuances have exceeded their planned levels. Also, J.P. Morgan research believes that the fiscal picture for China’s federal government is worse than it appears when factoring in local government financing initiatives, policy banks, and other channels.

This slide shows what China’s GDP growth potential is, based on productivity, capital, and labor factors versus historical GDP growth. Growth potential since the 1990s has remained very high until recently. It is estimated that labor contribution will turn negative over the next several years due to the worsening demographic outlook in China.

For the past several years, a new economic cycle has been emerging in Japan, characterized by stronger inflation, wage growth, and positive interest rates. 

India is one of the fastest-growing emerging markets in the world, supported by strong domestic consumption thanks to its growing middle class and government investment in key initiatives.

This slide analyzes the relationship between GDP growth, earnings growth, and equity market performance across different markets. The strength of this relationship varies by market. In countries like India and the U.S., there is a strong correlation among the three factors. However, in other countries, such as China, robust GDP growth has not translated into better earnings and equity market returns. Conversely, in Japan, equity returns have significantly outpaced GDP growth.

Many markets have made significant progress in increasing quality and focus on shareholders over the past 10 years, like the U.S. and Japan. However, some countries, like China, have gone in reverse.

Corporate governance reforms in Japan have played a important role in enhancing the earnings outlook for Japanese companies. Over the past several years, buyback announcements and net profit margins have been on the rise. However, there remains significant potential for improvement in increasing price-to-book values and effectively utilizing liquid capital.

Indian equities have experienced tremendous growth over the past 15 years, leaving valuations elevated. This has coincided with greater retail investor participation in markets. However, earnings estimates may have been overly optimistic and are now normalizing.