Southeast Asia’s markets will move in a way similar to that of a “bungee jump” in 2023, plunging before surging in the second half of the year, according to JPMorgan analysts.

That’s likely to be characterized by a “sharp fall followed by a rapid increase in altitude (bear market rally) followed by another decline until eventually markets come to rest at rock-bottom,” analysts led by Rajiv Batra wrote in a report. They attributed that to weakened purchasing power in light of monetary policy tightening, lower savings and the higher cost of borrowing.

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JPMorgan expects the MSCI ASEAN Index to “re-test this year’s lows and potentially move even lower” in the first half of 2023, weighed down by weaker external demand, tightening financial conditions, and a “fading” reopening boost, among other factors.

The MSCI ASEAN Index fell 22% from February’s high to the year’s lowest in October. The index subsequently rebounded 10%, buoyed by hopes of China reopening and a pivot from the U.S. Federal Reserve.

The index measures large and mid-cap stock performance across four emerging markets, one developed market and one frontier market. In total, it comprises 170 constituents across Singapore, Indonesia, Malaysia, Philippines, Thailand and Vietnam.

Fed interest rates are expected to reach 5% by May, and a U.S. recession is expected at the end of the year.

But “contrary to investors’ belief, the equity market has failed to fully price in a recession until it happens,” the report said.

Trade-oriented economies like Singapore, Thailand, Vietnam and Malaysia will be especially affected by the slower global growth to come and weaker demand for durable consumer goods.

On top of that, China’s expected relaxation of Covid restrictions is unlikely to offset the forecast plunge.

The Thai economy, for example, is expected to be hit by a “significant decline” in exports, private investments and manufacturing, with JPMorgan analysts downgrading their 2023 gross domestic product growth forecast from 3.3% to 2.7%. 

Singapore is also expected to face more challenging macroeconomic conditions.

“We expect that the weakening in external demand will continue to slow [Singapore’s] goods producing sector even as the services sector provides some offset.”

Singapore’s upcoming goods and services tax hike — from 7% to 8% — would also dampen demand and consumer sector outlook, JPMorgan said. 

China’s “reopening impulse” is also estimated to be modest given global recessionary conditions.

 Mainland China relaxed many of its stringent Covid controls in the past week, with national authorities announcing a slew of sweeping changes such as ease of travel domestically, keeping businesses operating and allowing Covid patients to quarantine at home.

“The benefits from China’s reopening will be offset by recessions in the developed markets,” JPMorgan analysts told CNBC, adding that Southeast Asian markets have high exposure to exports and demand from the economies of developed markets.

But China’s reopening to international travel, if it happens, would be a “positive catalyst” for Singapore’s economy. Chinese tourists accounted for around 20% of Singapore’s tourist arrivals in 2019, whose return could also “generate knock-on impacts on [Singapore’s] consumption and travel-related services sector.”

Nevertheless, JPMorgan estimates that the uptick will still likely be limited by the aforementioned global recessionary conditions and external demand challenges that the country faces.

A full border reopening from China would also add “potential upside” for Thailand’s tourism recovery, and that could be inflationary, according to the report.

“There is an argument that China’s earlier-than-expected border reopening is inflationary,” JPMorgan said. Nevertheless, while tourism may stimulate wage gains and consumption, it is not tightly correlated with inflation in countries like Thailand, where the nature of inflation is primarily supply-driven, the analysts added.