This is a sponsored article from PineBridge Investments.
Over the next 12 months, investors in Asia are likely to contend with a fast-moving investment landscape shaped by the impact of China’s recent policy pivot alongside the tenor of monetary and fiscal policy and the path of inflation. PineBridge Investments’ specialists offer their views on what investors can expect in 2022 and the select opportunities arising from this confluence of changes.
After the pandemic-related upheavals, subsequent supply bottlenecks, and China’s policy pivot in 2021, investors might be looking forward to a return to some form of normal in 2022. But don’t count on it: Disruptions appear more likely to dissipate than to disappear, causing asset markets to move in waves as the year progresses, says Michael Kelly, Global Head of Multi-Asset, at PineBridge Investments.
“A rapid loosening of supply constraints that in turn helps bring core inflation back toward 2% is unlikely, and the big change in 2022 will be the visible hand of monetary excess slowly pulling back,” says Kelly. “We see a choppy flatness ahead, at least for the first half of 2022, a standoff between positive (albeit slowing) cash flow growth and reduced monetary excess, and its impact on capitalization rates. This standoff as 2022 unfolds looks poised to be quite exciting, with bigger winners and bigger losers.”
Kelly says the first asset class likely to catch a wave will be equities, especially in developed markets, when bottlenecks start to clear toward the end of the year. Two markets on his team’s radar are Japan equities and China A-shares.
“In China, we disagree with those who assert that this market is ‘uninvestable’. For those new to China, however, we think it’s not a place to try a blanket, index-based approach,” he says.
All eyes on China and India
Cynthia Chen, lead manager of the firm’s A-share portfolios, says China’s recent regulatory changes will set the tone for 2022, as the focus on sustainability becomes increasingly central to the Chinese economy. In the near term, economic growth may see downward pressure amid slowing property sector activity and power shortages that have led to the suspension of production in some regions.
“While there are reasons to be circumspect on corporate earnings prospects, we see this environment as an opportunity to accumulate high-quality stocks, as valuations have become supportive in certain sectors,” says Chen. “There is some uncertainty over whether more regulatory changes are in the offing, but we believe the A-share market would carry a lower policy risk premium than offshore markets since domestic investors typically have higher confidence in policy visibility.”
While markets have focused on the sell-off, Chen adds investors should not lose sight of a more important and long-lasting aspect of the regulatory shift: China’s elevation of sustainable business models and strong governance underscores the importance of environmental, social, and governance (ESG) factors in stock selection. Companies with better ESG performance will likely be the disruptors rather than the disrupted.
Economist Markus Schomer says energy supply issues, unresolved trade frictions with the US, and a stressed housing sector suggest downside risk to China’s 5.7% growth forecast for 2022. On the other hand, India is set to outperform all other major economies in 2022. While India’s GDP growth is not likely to hit the IMF’s forecast of 9.5% in 2021, Schomer says the strong finish to the year means India should be on track to beat expectations for 2022.
India’s equity market has been one the best performers in Asia in 2021. Global Head of Equities Anik Sen sees opportunities from India’s investment in public digital software that is radically changing the way business, notably banking, is conducted. “We are highly constructive on companies that are seeing rapid growth by using their software capabilities and marketing prowess to take advantage of the improved public infrastructure to create low-friction customer interactions,” he says.
Asia fixed income: fit and resilient
Meanwhile, outside of a few sectors and idiosyncratic situations, Asia’s steady and improving credit fundamentals should offer a strong foundation for the region’s fixed income market in 2022.
“We expect credit spreads to tighten in the next 12 months, with pronounced credit divergency alongside the expected increase in the number of defaults in 2021,” says Arthur Lau, Head of Asia ex Japan Fixed Income. “The default rate is likely to rise to the low teens in full year 2021. However, we expect this to fall to single-digits in 2022. We view these defaults to be mainly idiosyncratic rather than systemic in nature, which calls for thorough credit differentiation.”
With Chinese high yield (HY) bonds accounting for over 50% of Asia’s HY bond market, the development of this segment will determine how the broader market will perform over the next 12 months. In the near term, the Chinese property sector is expected to remain under pressure as concerns about the sector’s liquidity and refinancing risks intensify, but Lau thinks the government has adequate tools to contain any risk from this sector.
For Asia’s investment grade (IG) market, Lau expects volatility to ease in the coming 12 months in view of the overall benign economic backdrop. “US interest rates will likely be the major source of risk. We think with a more uncertain growth outlook and interest rate risk, an IG portfolio with higher overall credit quality should generate better risk-adjusted returns,” he says.
Loose for longer
Unlike the West though, inflation in Asia hasn’t accelerated as much as it did in Europe or the US. Asian central banks are under less pressure to remove emergency policy accommodation.
“In a world of re-emerging policy rate differentials, this should lead to weaker Asian currencies and stronger terms of trade. We are not likely to see a return to the level of globalisation we saw prior to the pandemic, which will weigh on the long-term growth prospects of the region,” says Schomer. “Yet despite these headwinds, the IMF’s 5.1% growth forecast for Asia is still the strongest for any region of the globe.”
For more economic and asset class insights, see our full 2022 Investment Outlook: Investing in a Climate of Change.
This is a sponsored article from PineBridge Investments.
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