Asian stocks rose on Wednesday, December 27, 2023, as investors cheered the prospects of lower interest rates and stronger economic growth in the region. The MSCI index of Asia-Pacific shares excluding Japan gained 1.2%, reaching its highest level since June 2023. Japan’s Nikkei 225 index climbed 1.5%, while China’s Shanghai Composite index advanced 0.8%. Hong Kong’s Hang Seng index surged 2.1%, led by gains in technology and consumer stocks.
One of the main drivers of the market rally was the expectation that central banks in Asia would cut interest rates to support the economic recovery from the COVID-19 pandemic. The Bank of Korea, the Reserve Bank of India, and the Bank of Thailand are among the central banks that are likely to lower their policy rates in the coming months, according to analysts.
The Bank of Korea, which has kept its benchmark rate at 0.5% since May 2020, is expected to cut it by 25 basis points in January 2024, according to a Reuters poll of economists. The Reserve Bank of India, which has maintained its repo rate at 4% since May 2020, is also expected to reduce it by 25 basis points in February 2024, according to another Reuters poll. The Bank of Thailand, which has held its policy rate at 0.5% since May 2020, is forecast to cut it by 25 basis points in March 2024, according to a Bloomberg survey of economists.
The rate cuts are expected to boost consumer spending, business investment, and credit growth in the region, which have been hampered by the pandemic and its social distancing measures. The rate cuts are also expected to weaken the local currencies, which would make the exports more competitive and increase the earnings of the exporters.
Economic Recovery on Track
Another factor that boosted the market sentiment was the positive economic data from the region, which showed that the recovery was on track. The latest data showed that the manufacturing activity in China, Japan, and South Korea expanded in November 2023, indicating that the industrial sector was resilient despite the supply chain disruptions and the energy shortages. The data also showed that the consumer confidence in China, Japan, and India improved in November 2023, suggesting that the household spending was picking up.
The economic recovery in the region was also supported by the progress in the vaccination programs and the easing of the COVID-19 restrictions. According to the World Health Organization, as of December 26, 2023, more than 70% of the population in China, Japan, and South Korea had received at least one dose of the COVID-19 vaccine, while more than 60% of the population in India, Indonesia, and Thailand had received at least one dose. The high vaccination rates allowed the governments to relax some of the lockdown measures and reopen some of the sectors that were hit hard by the pandemic, such as tourism, entertainment, and hospitality.
Outlook Remains Positive
The outlook for the Asian markets remains positive, as the investors anticipate that the rate cuts and the economic recovery would sustain the momentum in the region. The analysts also expect that the region would benefit from the global demand recovery, as the major economies such as the US, the EU, and the UK would also ease their monetary policies and stimulate their fiscal spending.
However, the analysts also warn that there are some risks that could derail the market rally, such as the emergence of new COVID-19 variants, the inflationary pressures, the geopolitical tensions, and the regulatory uncertainties. The investors should therefore remain cautious and diversified, and monitor the developments closely.
