Opportunities in a deglobalising world Opportunities in a deglobalising world Opportunities in a deglobalising world

Opportunities in a deglobalising world

Charu Chanana

Head of FX Strategy

Summary:  New alliances and collaborations outside of China may lead to prosperous times in Asia.

In Asia, the model of dependence on China is breaking, and new supply chain linkages and more regional co-operation will bring the next leg of outperformance for the region in 2023. 

Asian stocks have started 2023 with a bang, with the MSCI Asia Pacific Index and the MSCI Emerging Markets Index entering a bull market in January, outpacing the US S&P 500. A lot of this has been driven by China’s policy shifts and a weaker US dollar. However, risks of a slowdown in the global economy as well as inflation remaining higher-for-longer cannot be discounted. The outlook for domestic demand in Asia is also challenged by the rise in interest rates seen in 2022. Meanwhile, geopolitical risks remain in play, clouding the outlook. 

The other key thing to consider will be that Asia’s dependence on China is waning, as is evident from the region’s outperformance in 2022 despite China’s slowdown. As China reopens, we are likely to see new supply chain models and more regional co-operation that will push Asia’s relevance higher in the global economy. 

Source: Bloomberg, Saxo Markets

New supply chain models to increase Asia’s relevance

The escalating US-China trade and tech wars have prompted many companies to diversify their supply chains to reduce risks from sanctions. The pandemic had already highlighted the need to address concentration risks as supply chains for everything from basic industrial components to medical supplies and even toilet paper were over-reliant on China. Finally, the invasion of Ukraine and the resulting impact on Europe’s gas supplies has set a clear agenda for many countries traditionally aligned with US foreign policy to think about supply chain resilience and avoid relying too heavily on Russia or China, and instead sourcing from friendly countries. 

Japan, for instance, is not just looking to diversify its LNG suppliers and trying to bring its nuclear reactors back online to ensure a resilient energy supply in the long run, but also trying to pivot away from a reliance on China and Russia for food to reduce the risks of getting cut off. More broadly, Japan is on a war footing, as is evident from the surge in defence spending, closer alignment with the US and outright condemnation of Russia’s attacks on Ukraine. This means a new economic and geopolitical order may be in the works in Asia.

Winners of China+1 

A group of Asian countries is emerging as possible winners of the deglobalisation and decentralisation trends. Investments in India have accelerated, given its attractiveness as a consumer market and a favourable policy stance. Apple has started manufacturing of iPhone14 in India, and it is expected to shift a material share of its iPhone production to India by 2025. If this move is successful and Apple is able to deliver its planned output, that will be a significant endorsement of India’s manufacturing capabilities. However, going into 2023, India’s valuation has become stretched and there are other, relatively cheaper markets that offer better value after deep drawdowns last year. This means India will have to prove its relevance again through continued economic reform to attract foreign investment. 

Source: World Bank, Bloomberg, Saxo Markets

Vietnam has been another winner of the China+1 strategy, as it has attracted a large share of manufacturing from China. Vietnam still provides relative value going into 2023, being a supplier of key components in broadcasting equipment, integrated circuits, telephones, textile footwear, clothing and furniture to the world. 

Indonesia was another outperformer in the Asian markets in 2022 given its high commodity exposure. As most countries struggle to ensure a baseload supply of energy, Indonesian coal could remain in demand in 2023. As well, a refreshed focus on green transformation will continue to push the demand higher for nickel and copper, Indonesia’s key export metals. EV makers like Tesla are looking to set up production facilities in Indonesia, as a step to diversify away from China, but also to locate production closer to raw materials inputs, in order to ensure supply chain resilience. Political uncertainty however will start to cloud the outlook in late 2023 as the race for 2024 presidential elections starts to heat up. 

Source: Bloomberg, Saxo Markets

Chip wars could decouple South Korea and Taiwan from China

The cold war between the US and China could take a strategic shift this year, and if we see continued restrictions on the semiconductor sector, that could potentially force major players in the semiconductor supply chain, such as Taiwan, Korea and Japan, to decouple from China. Taiwan has recently passed a law that will allow local semiconductor companies to get tax credits for up to 25 percent of their R&D expenses. This could be followed up with similar provisions from the US and Europe to better attract investment, and that could mean a potential re-rating of the semiconductor sector in 2023.

The early batch of earnings reports in the semiconductor space have seen dismal results and high inventories weighing on sentiment. But there is potential for a demand recovery with China’s reopening, an auto sector bounce-back and further investments in the expansion of data storage centres. Taiwan may be suffering a ‘geopolitical discount’, judging from the MSCI Taiwan valuation, which is far below its five-year average despite the recent surge in equities in the region. This contrasts with MSCI Korea, which has just moved above its five-year average with the gains at the start of 2023, though it has a lot of room to catch up with the 2020 highs.

ASEAN’s potential to enjoy a privileged geopolitical position

As the world grapples with its over-dependence on China in 2023, China’s trade with ASEAN countries will nonetheless likely grow further in 2023, creating room for more growth in the region. As supply chains relocate out of China, many manufacturers still need to source parts for assembly from there. And China is a major foreign investor in Southeast Asia, accounting for around 8 percent of total FDI flows to the region in 2016-2020, a 65 percent increase over 2011-2015. In addition, China’s strategic shift to move to high value-added manufacturing has seen a lot of low value-added manufacturing move to neighbouring countries with lower wages. China’s exports to Vietnam rose 40 percent over 2019 to 2021, with much of it being inputs and components for Chinese-owned factories in Vietnam, where production there in turn is primarily for export. Recovering Chinese demand should also help restore ruptured supply chains, and improve the demand for ASEAN exports. Tourism demand is also likely to pick up as Chinese tourists return to Southeast Asia with the border reopening. In summary, 2023 brings the perfect combination of positives for Asia. In the short-term, the region gets a bump higher from China’s reopening. Meanwhile, Asia will become a key part of global supply chains in the longer run and enjoy a privileged geopolitical position which is key for both China and the US.


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