This is a sponsored article from PineBridge Investments.
Omar Slim, CFA, co-head of Asia ex-Japan fixed income and portfolio manager
Andy Suen, CFA, FRM, co-head of Asia ex-Japan fixed income and portfolio manager
Elizabeth Soon, CFA, head of Asia ex Japan Equities
Huzaifa Husain, head of India Equities
Cynthia Chen, CFA, portfolio manager, Asia ex Japan Equities
After finally emerging from a world-changing pandemic, economies and markets have been subject to an array of stressors: more persistent inflation than expected, rising policy rates, war-induced supply chain and energy security disruptions, and escalating geopolitical tension – and, to top it off, a looming global economic slowdown. Growth concerns are fuelled by sizeable and front-loaded monetary policy hikes to tame inflation in much of the world, led by the US Federal Reserve.
Monetary policy in much of Asia has followed or pre-empted the Fed’s. Critically, however, Asian central bank moves have generally been much less aggressive, and we expect this trend to continue. To start with, monetary policy was not as accommodative as that of the major developed market central banks. The monetary policy U-turn is therefore less extreme. Additionally, while inflationary pressures exist in Asia, they are relatively subdued. Our base case is that monetary policy will move closer to neutral but not into restrictive territory for most Asian countries. India, for instance, still sees credit growth and real estate growth despite recent rate hikes.
In this article
Asia’s rate hikes have been moderate
Source: PineBridge Investments as of 30 September 2022.
The rate hikes have, not surprisingly, contributed to the weakening of Asian currencies, pushing returns on local currency bonds down. This will have an impact on the issuers’ debt servicing ability. Our analysis shows that this will not be across the board, however, especially since we expect the US dollar’s strength to subside next year.
We see select opportunities in the key asset classes in Asian fixed income.
USD-denominated Asian investment grade
We still think Asian investment grade (IG) bonds provide compelling risk-adjusted returns, with higher yield and shorter duration than similar high-quality bonds in other regions. This makes the asset class a strong diversifier for global fixed income investors.
Despite increased government spending for COVID relief and inflation threats to earnings, Asia IG fundamentals have remained broadly strong. Corporate earnings in Asia ex Japan have generally been revised upwards, in contrast to the declining trend in the US. Export earnings have been robust, and a stronger dollar could offer support for exports to grow further. Moreover, any funding cost pressures for corporates are partly met by local debt market access. China’s onshore corporate bond yields in particular continue to tighten, supporting China investment grade issuers’ access to cheap funding.
From a valuation perspective, the Asian IG market generally has higher yields and spreads than similar markets, but with a shorter duration, making it less interest rate sensitive.
Asia high yield
Understanding the components of the Asia high yield market is key to navigating the credit challenges in this asset class. Following the series of defaults in China’s property sector, the sector’s weighting in the Asia high yield index has shrunk significantly, to 8.3% of the JACI HY index currently from 35% in mid-2021. While the property sector will keep dominating headlines, its drag on Asia high yield will be much lower, highlighting the improved industry diversity of this market. At the same time, corporate default rates have stayed relatively low outside of the China property segment.
The loosening of China’s COVID policy could be very positive for certain high yield sectors, such as gaming – particularly for Macau, which has yet to clear pandemic obstacles. Notably, we are now seeing promising opportunities emerge beyond Chinese property, including renewables, short-dated commodities, and segments benefiting from post-COVID reopenings, such as airports. Valuations in these sectors have become attractive partly due to the spillover of China’s property sector.
Asian local currency bonds
Based on our view that the US dollar’s strength will subside in 2023, we expect Singapore dollar bonds to outperform, in view of the hawkishness of the city-state’s central bank.
We also believe the reopening theme in Thailand will bode well for Thai baht bonds following a recovery in tourism, in turn helping to bring the country’s current account back to surplus.
Pockets of equity opportunities for diversification and long-term growth
Turning to Asia equity markets, they struggled to swim against the tide for most of 2022, weighed down by the risk-off sentiment globally amid inflation and rate hikes. While returns in 2022 were negative for the Asia ex Japan region as whole, India and the Association of Southeast Asian Nations (ASEAN) market outperformed the global equity benchmark.
The question on Asia equity investors minds is how and where to find diversification and long-term growth in an environment of instability and inflation. We believe patience pays off in the long run, and while the dark economic clouds are not lifting any time soon for the global economy, there are always pockets of opportunities in Asia to uncover.
In a year marked by an unwelcome positive correlation between developed market equities and bonds, India equities offered a rare diversification opportunity for global investors. The Indian economy has been growing steadily, drawing strength from its macroeconomic fundamentals and buffers. Supported by time-bound and targeted monetary, regulatory and fiscal policies, the economic recovery against a volatile global background has been broad-based and resilient.
Today, India is uniquely benefiting from a confluence of a multitude of factors. With a reconfiguration of supply chains of global manufactured goods, India has also been establishing itself as a credible supplier. A credible and responsive monetary policy stance provides confidence that financial and economic stability will be maintained, even during the global financial volatility. And availability of low-cost risk capital as evidenced by several successful IPOs is helping businesses to scale up rapidly.
We believe high-quality companies that can take advantage of these trends and expand market share will outperform. Market valuations remain high, which is not uncommon for India. In such a dynamic market with multiple competitors rising in each niche market, we cannot overemphasise the need for careful stock selection – a thorough company-by-company assessment to uncover hidden value.
In contrast to India, economic activity in China has slowed, and with the COVID control measures relaxed, the upside might be significant. We believe the Chinese A-share market offers tremendous opportunity for value seekers as valuations have significantly fallen for high-quality companies that are expected to bounce back after controls ease. In addition, we expect continued policy support, though calibrated to avoid creating the bubbles of the past.
As the government deleverages the property sector further and redirects resources to other parts of the economy, there are structural opportunities in sectors such as advanced manufacturing, areas where China is seeking technological self-sufficiency, consumption, and others. Invested well, we believe these could be areas of solid investment returns in the future.
The ASEAN market was the second best-performing market after India in Asia in 2022. At an early stage in their post-pandemic recovery journey, high-quality companies are still trading below historical averages. Companies are taking advantage of pent-up demand in the short term (for example, travel and tourism), and secular growth drivers such as digitalisation, consumption, sustainability, and urbanisation over the long run.
Investing through the trough
As long-term investors, we lean in on our convictions that the fundamentals of the companies we have in our portfolios will stand the test of time. We have seen economic slowdowns and inflationary periods before in Asia, and our experience has yielded two lessons. First, that remaining invested through the troughs will yield larger rewards when the market swings back again. Today’s market challenges may turn out to be mere speed bumps in hindsight, while your investment continues to compound over the long-term. The second lesson is that while the market overall may be trending down, price dislocations and a mismatch to fundamentals may present opportunities for the long-term and selectivity is more important than ever.
For more viewpoints from senior investment leaders at PineBridge Investments, please visit the 2023 Investment Outlook: Five Themes Driving Global Markets in a Year of Pivots.
All investments involve risk, including the loss of principal amount invested. Past performance is not indicative of future results. Any views express represent the opinion of the manager and are subject to change. We are not soliciting or recommending any action based on this material. In Hong Kong, this document is issued by PineBridge Investments Asia Limited. This document has not been reviewed by the Securities and Futures Commission (SFC). Investors should note that the website www.pinebridge.com and any other website referred to in this document have not been reviewed by the SFC and may contain information of funds not authorised by the SFC. In Singapore, this document is issued by PineBridge Investments Singapore Limited (Company Reg. No. 199602054E), licensed and regulated by the Monetary Authority of Singapore (MAS). This advertisement or publication has not been reviewed by the MAS. Investors should note that the website www.pinebridge.com and any other website (including any contents therein) referred to in this document have not been reviewed or endorsed by the MAS.
This is a sponsored article from PineBridge Investments.