China, Fed and Elections: What Will Move Asia Stocks in 2024

(Bloomberg) -- Asian equities can look forward to a boost from interest rate cuts and a weaker dollar in 2024, but it's China that will determine the region's performance versus peers.

Whether the world's second-biggest economy can finally recover and fix its embattled property sector is among the main questions for investors this year. Chinese stocks ended 2023 with a record third year of losses and contributed to the MSCI Asia Pacific Index trailing global equities by 11 percentage points.

India, South Korea and Taiwan will see their double-digit rallies tested by election outcomes. In Japan, a likely pivot by the central bank will determine how exporters' shares fare after the stock gauges had their best year since 2013.

Below are the five areas of focus for Asia equity investors in 2024:

China Recovery

After another dismal year for China bulls, investors will watch meetings of the National People's Congress and the third plenum for Beijing's growth target for 2024 and clues on fiscal stimulus. 

China's outlook remains challenged but Beijing has failed to unleash a wider-ranging stimulus as hoped by the market. Traders are pinning hopes on the People's Bank of China to enact more policy easing, although any market impact has so far been short-lived.

Sudden draft regulations on the gaming industry in December have reignited worries about Beijing's stance on private enterprise, while the semiconductor and clean energy sectors may still be caught in the crossfire if geopolitical tensions with the West flare up.

Policy Pivots

Dovish Federal Reserve narrative and the health of the US economy will be crucial to the direction of the dollar and interest rates in Asia, and will drive demand for the region's shares. Although minutes of the latest meeting indicated increased optimism among US policymakers about the path of inflation, there was no signal of an imminent rate cut in March.

Investors will also look for a signal from Bank of Japan Governor Kazuo Ueda to finally exit negative rates. His comments last month suggest the central bank may move as early as April. Higher borrowing costs may boost the yen and hurt index-dominating exporter stocks, scuppering the ongoing rally in Japanese shares. 

Read more: Korea, India Stocks Poised for Biggest Foreign Inflows in Years

Election Calendar

A busy lineup of polls in key markets including India, Indonesia, South Korea and Taiwan in the first half will see investors turn focus to political risk. 

Taiwan's election this month is expected to shape US-China ties, while in India and Indonesia, investors are betting pro-growth policies of Prime Minister Narendra Modi and President Joko Widodo will continue. 

The impact of South Korea's April legislative election is already being felt with a ban on short selling aimed at protecting retail investors. President Yoon Suk Yeol has pledged to scrap the planned capital gains tax on income from financial investments and promised reforms including changes to the pension system and the prevention of market monopolies.

Read more: Asia Stocks in Better Shape Than US to Weather Election Turmoil

India Momentum

The country remains a bright spot even with benchmark equity gauges at record levels after an eight-year winning run. 

Global investors are bullish as India bags high-profile manufacturing contracts, boosts infrastructure spend and emerges as an alternative to China. 

Modi's party is widely expected to win the election expected in April or May, especially after his victories in the recently concluded state polls. Investors face the risk of a large market correction — of 25% or more according to Jefferies LLC — if the ruling administration suffers a surprise defeat. 

Chip Concerns

ChatGPT's success drove an unexpected boom in chip shares in 2023. The onus is now on Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. — the world's two leading contract chipmakers — to show how artificial intelligence-linked demand is boosting earnings. 

Higher demand from the US and China will also be key to sustain the optimism around these exporters after Korea's chip production and shipments recorded the largest gains in years in November — a sign of an upturn in the semiconductor cycle. 

(Updates with details of latest Fed minutes in eighth paragraph.)

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