After another uneven year in Asia, from a lagging China to global macro pressures and geopolitical concerns, the beginning of 2023 is showing more bright spots for investors — and opportunities for their sell-side research firms.
“The back half of 2022 was a story of the underperformance of China. This trend, when combined with further fracturing of geopolitics, led many to try and ‘diversify regionally’ with renewed interest in places like India and Japan,” said Martin Yule, head of Asia-Pacific research at UBS. “In contrast, 2023 has seen tentative steps back towards China, but without the same vigor of the last few years.”
After the country abruptly dropped its ‘zero-Covid’ approach in late 2022, all eyes have been on China’s post-pandemic reopening and recovery. “Investors are happy that the debate has returned to the pace of economic recovery rather than mutant strains of the virus, but geopolitics remains the cloud overhanging North Asian equities,” Yule added. “Investors continue to grapple with global influences of inflation, tightening policy in much of the world, and weakening growth.”
But among the clouds, there is cause for cautious optimism, according to Magdalena Stoklosa, director of Asia research for Morgan Stanley. “Markets have been challenging for investors, despite the increase in headline indices since the October 2022 trough,” Stoklosa said, adding that while China’s reopening has not had the broad‐based impact that many were initially hoping for, market participants do see the recovery continuing.
“Geopolitical considerations have remained central as we see policymakers and corporates pursuing a de‐risking of supply chains in this more multipolar world,” she added. “That said, with Asia driving the majority of global GDP growth, earnings poised for strong recovery into 2024 and valuations attractive, we see grounds for optimism.”
Macro and geopolitical risks were key market drivers in 2022, creating a frustrating investment environment for many fundamental clients and analysts, according to James Sullivan, head of Asia Pacific equity research for JPMorgan Chase. “2023 has seen a resurgence in the importance of sector thematics and bottoms up company analysis . . . an environment in which our analyst team thrives,” he added. “If 2022 was ‘challenging,’ ‘dynamic’ perhaps summarizes 2023 so far.”
Fundamentally, Asia, with the exception of China, benefitted much from post-Covid recovery in 2022, according to Brent Robinson, Citi’s head of pan-Asia research. “China has that benefit in 2023 though the recovery seems uneven and slower than market expectation, partly dragged by property sector as well as lack of consumer confidence,” he said. The strong U.S. dollar driven by Fed’s interest rate increases was an adverse factor for emerging markets, and geo-political concerns has led many overseas investors, particular the U.S. ones, to remain underweight in China. “The inflation outlook and monetary policy in the region is very mixed,” Robinson added.
The result was a year of “divergence,” according to Erica Poon Werkun, head of Asia-Pacific securities research at Credit Suisse. “The pace of China’s recovery is slower than the market had anticipated, and performance of Asia Pacific [excluding Japan] tech stocks has badly lagged U.S. peers. In contrast, Japan has bucked the trend, which was a surprise to many. Value-hunting and reshoring has made Japan an outlier on the positive side.”
To navigate these ups and downs, investors have once again turned to a familiar stalwart of sell-side research firms in the region, according to the 30th annual edition of Institutional Investor’s All-Asia Research Team.
Morgan Stanley has once again taken the No. 1 spot in this year’s ranking, as decided by more than 5,500 portfolio managers and analysts representing over 1,500 institutions with major securities holdings in Asia (ex-Japan).
UBS repeated its second-place finish, while JPMorgan improved one spot to tie for third place with Citi. BofA Securities and Credit Suisse remained unchanged in the fifth and sixth spots, respectively.
The competition of sell-side research firms remains heightened and, like last year, the leaderboard places are separated by thin margins. Morgan Stanley increased its total number of team position by one to 36. UBS had 34, and Citi and JPMorgan both earned 33.
Morgan Stanley’s Stoklosa credited the firm’s collaborative culture as a differentiator. “Our primary aim is to help clients generate alpha,” she said. “Our edge as a research department is having world‐class analysts who collaborate across sectors, regions, and asset classes. This collaborative culture led us to identify three big themes for 2023 — tech diffusion, decarbonization, and the multipolar world. These shifts will have a profound impact on markets for many years, and they require a cross‐asset approach given their complexity and investor demand for meaningful insights. Asia plays a critical role in the evolution of these trends and our regional analysts are providing thought leadership across each big theme.”
And there continues to be a strong market for insight, driven by the most relevant data and analytics, according to JPMorgan’s Sullivan. “Analysts today have access to tools that we only could dream of only a few years ago, creating the richest analytical environment the industry has ever seen,” he said. “Clients tell us that they value analysts who are willing to challenge their own assumptions and adapt frameworks in a dynamic investment world. We employ some of the longest tenured industry and country experts in the industry — the challenge is providing the best tools and training to allow all of us to continue to evolve in this new environment.”
For the buyside, the explosion of data providers and analytical platform creates opportunity, but also risks creating so much noise that the all-important signal is lost, he added. “Managing the firehose in a way that enables and not paralyzes decision making is central to success in markets in this new world,” he said. “JPMorgan has both the scale and the expertise to help clients across bottoms up analysis [and] analytical platforms, as well as the structure of markets themselves to be a complete partner in their investment process.”
As for UBS, Yule reported that the firm continues to look for innovative ways of improving its offering to investing clients via its Evidence Lab product, which continues to gain traction, with clients identifying alternative data as a key differentiator in the support they receive.
“At UBS we are focused on producing really high-quality insights around the key pivotal questions that drive each stock and sector,” Yule said. “Our ‘APAC Focus’ product is the best illustration of this as it is the research we are most proud of. Quality research, when coupled with unique alternative data, can really help our investing clients in their investment process.”
Yule also mentioned UBS’s pending acquisition of Credit Suisse — announced in March of this year — as something to watch in the region. “Credit Suisse has been one of our key competitors across APAC, so the combination of our two firms represents an outstanding opportunity for us to add talent to our offer.”
Credit Suisse’s Werkun noted that her firm’s increase in number of analysts ranked by II this year — from 21 to 32 — was due to its approach of “industry immersion,” where analysts work toward embedding themselves as industry experts across their areas of coverage. “This approach has paid dividends in terms of creating market-moving thematic calls and clients turning to our analysts as true experts in the region,” she said. “With Covid travel restrictions behind us, the key in Asia is also a thorough on-the-ground, tire-kicking approach across the supply chain.”
To allocate resources ahead of big trends at Citi, Robinson and his team are emphasizing what they call “super sector” collaboration — seen most recently in its electric vehicle collaboration to look at all angles of the industry. “We will continue to be nimble and dynamic with resourcing to stay ahead of the curve,” he said.
And the upcoming curve will include much to navigate for the sell side, including 2024 elections in both the U.S. and Taiwan. “Against the global backdrop of ‘rolling recessions’ and monetary policy tightening, the regional economy has been holding up well and the demand for financial services, especially sell-side research, remains strong,” Robinson added. “Of course, the ripple effects of the recent bank failures on our sector are still unfolding. With our first-class research capacity, we are well positioned in such an environment to take advantage of opport
