Q3 2023 Update from the Asia Trade Floor

Text on screen: Jingjing Huang, Credit Product Strategist

Jingjing Huang: Hello, I’m Jingjing Huang, credit product strategist. Welcome to our quarterly Asia trade floor update. Joining me today is portfolio manager Stephen Chang.

Stephen, China’s economic troubles have been making headlines recently. Premier Li Qiang has said that China is at a critical stage in its economic recovery. What is PIMCO’s outlook for China? Is it still on track for its GDP target?

Text on screen: Stephen Chang, Portfolio Manager, Asia

Stephen Chang: We believe China’s 2023 GDP growth target of 5% will not be difficult to achieve, given its very strong first quarter growth. But its post-COVID-reopening momentum appears to be fading. The loss of consumption-growth momentum, amid an already weakening export sector and a fragile property market, argues for more government support and stronger stimulus measures in order for confidence to return among consumers and the private sector. However, we believe any near-term credit or fiscal easing in China will likely be targeted and modest.

Jingjing Huang: A significant proportion of China’s GDP – some estimates were as high 30% -- used to come from its property sector and related industries. Do you think the latest support measures are enough to reignite the sector’s growth?

Stephen Chang: We think the current accommodative policy environment in China’s property sector will continue until it sees a sustainable recovery. However, the impact of the demand stimulus has been offset by low homebuyers' confidence, weak property price expectations, and property construction risks due to the defaults in the sector.

Recent property sales recovery data have been lackluster and property-related construction activities have slowed down across the board. In our view, a better macro outlook and greater income security are necessary conditions for a sustainable sales rebound. We continue to expect a bumpy path to recovery ahead.

Jingjing Huang: As China and much of the world faces challenges in economic growth, investors are increasingly turning their attention to Asia’s emerging markets for resilience in navigating market volatility. Where is PIMCO seeing opportunities?

Stephen Chang: Economic growth in India is expected to outpace that of China this year and next – with Indonesia following closely behind in third place among major economies – according to the latest OECD global economic outlook.

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India and Indonesia: Strong growth expected over secular horizon due to:

• Reform-oriented governance
• Macro stability
• Young populations

Over the secular horizon, we expect real GDP growth for India at 6-7% and Indonesia at 5-6%, due to continued reform-oriented governance and macro stability. Their younger populations, in contrast to an aging China and developed countries, make them ideal for reaping the demographic dividend.

For India, the renewed manufacturing push, production-linked incentives, and closer ties with the U.S., position it as a top destination for the "China plus one" strategy. India's focus on becoming self-sufficient and its strong digital infrastructure make it a leader in services exports and public digital infrastructure. Additionally, India's energy transformation agenda, particularly in solar energy and green hydrogen, is expected to drive further growth.

Indonesia's growth potential lies in downstream processing of its natural resources, replicating the success it has seen with nickel. It is also well-positioned to become the Southeast Asia hub for the Electric Vehicle ecosystem, and has plans to develop tourism with its "5 New Balis" initiative.

Jingjing Huang: So how can investors tap into the India and Indonesia growth stories?

Stephen Chang: Amid global challenges, both countries have demonstrated institutional stability and political resolve, managing inflation and supporting growth through fiscal and monetary policy coordination. Both their central banks have implemented measures to curb currency volatility and manage fiscal financing.

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How can investors tap into the India and Indonesia growth stories?

• We believe currency valuations have not fully reflected the positive developments in the two countries.
• We see scope for currency appreciation, growth outperformance, and increased capital inflows.

Despite these positive developments, we believe currency valuations have not fully reflected them. Given favorable cyclical developments, steady interest rates and the credit profile, we see scope for currency appreciation and growth outperformance, along with increased capital inflows.  

The 2024 elections in both countries pose a potential key risk, but policy continuity is broadly expected.

Jingjing Huang: Looking more broadly across the Asia region, where else are we seeing opportunities?

Stephen Chang: Thematically, we are seeing select opportunities to capitalize on the cyclical recovery of the COVID-reopening across the region, particularly in service sectors. Overall, we believe inflation is not a problem for most of the Asia region, with a number of central banks pretty much done with tightening and perhaps reaching their inflation targets by the end of the year.

We believe Asia markets may offer better upside potential, given their more stable macro conditions versus western developed markets, which are seeing higher volatility in growth and inflation. Companies in Asia are not facing the same pricing power swings as those in developed markets, suggesting that their margins could be more robust and their earnings growth and credit metrics more secured.

Jingjing Huang: In the broader context of global economic growth, IMF forecasts that Asia will contribute about 70% of global growth this year – a much greater share than in recent years.

Well thanks, Stephen, for your thoughts today. And thank you for watching. Goodbye.