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Asia Equity and Fixed Income Outlook: Resiliency Amid a Perfect Storm for Markets

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This is a sponsored article from PineBridge Investments.

Authors: Cynthia Chen, CFA; Arthur Lau, CFA; and Elizabeth Soon, CFA

Our economic outlook for Asia for 2022 was pushed off track by Russia’s invasion of Ukraine, which sharply exacerbated the inflation pressures that are depressing economic sentiment and raising expectations of more aggressive monetary policy tightening. That, in turn, is driving rising recession concerns that are weighing on global financial markets.

On the flip side, a weaker growth outlook also means fewer rate hikes and less restrictive monetary policy. We would need to see a more sustained market rebound, and a turnaround in inflation, to lead to a pause in the rate-hike cycle and fading risks of recession. China is the only major economy cutting rates. But COVID-19 and continuing woes in the property sector are complicating attempts to use traditional stimulus tools such as increasing credit supply or cutting interest rates.

Asia ex Japan Equity: Cautious Positioning

Key to market stabilisation in Asia is the region’s COVID-19 recovery. We believe this hinges on three interlinked phases. The first is reaching high rates of vaccination to protect populations from severe illness. This, in turn, feeds into the second phase, in which the level of confidence about living with the virus rises, as demonstrated in Singapore. In the third phase, as the virus becomes endemic, economies would return to normal. That said, we expect a multi-track return to normal in Asia, with countries such as Singapore ahead of the pack, while Hong Kong and mainland China continue to follow dynamic zero-COVID policies.

While China has lifted some restrictions, the pressures on energy and commodities arising from the Ukraine conflict have not eased. We remain cautious, expecting volatility to persist for the rest of the year. Yet we also anticipate attractive opportunities to arise from the bottoming of the cycle. China’s policy easing is supportive for equities, adding to the reasons why China cannot be ignored in global allocations when most of the rest of the world is tightening. We remain overweight on Hong Kong and China, as we have been since the start of the pandemic, because we see signs of a bottoming of the cycle. Some of our investments in manufacturing have not been left unscathed by the lockdowns in China, but because these companies have diversified their locations across China and Asia, the downsides to their business have not been as significant as those for their competitors. As such, we continue to focus on the fundamentals of individual companies in making our investment decisions.

China Equity Valuations Are Attractive Again

We are cautiously optimistic about China equities into the second half and beyond. Current valuations offer reasonably attractive opportunities despite challenges to find the bottom of the market. Hence, investors could look beyond the near-term uncertainties and position for mid- to long-term recovery. That said, however, we do not expect China equities to bounce back to the valuations seen at the beginning of 2021, as the COVID-19 outbreak may have structurally changed China’s growth trajectory. We believe investors should not lose sight of the underlying secular trends that could drive future earnings, such as digitalisation, ESG-related imperatives, and rising middle-class consumption.

Current Valuations Present Attractive Opportunities

Source: MSCI as of 31 May 2022. For illustrative purposes only. Past performance is not indicative of future results.

Asia Fixed Income: On A Firm Foundation

Asia credit fundamentals remain largely steady, anchoring the asset class against volatility. Unlike most of the developed world, further policy easing is in the cards in China as authorities seek to moderate the economic slowdown and stabilise the property sector. We believe this presents an opportunity to surgically select higher-quality issues in the high yield (HY) segment.

Credit fundamentals have held steady despite pressures from rising US and regional rates and concerns about inflation’s impact on earnings. Given the short duration profile of Asia bonds in general, we think the interest rate trajectory in the US will have minimal impact on the asset class. Nevertheless, we remain underweight on duration. We believe recent volatility in the Asia HY market will subside in the next several months on the back of steady credit fundamentals for non-Chinese issuers. China’s COVID-delayed recovery means more defaults are expected in the Chinese property sector before stabilisation measures take wider effect. This, together with Sri Lanka’s default in May, indicates the expected decline in the Asia bond default rate will be pushed to 1H23 instead of this year. Meanwhile, some non-China HY credits are benefiting from strong commodity prices and steady credit fundamentals. We still favour commodity names as inflation becomes a tailwind for the sector. We expect this strong commodity cycle to last longer due to geopolitical tensions and the reopening of many major economies post-COVID.

The reopening theme is strengthening, with Thailand and Indonesia among the latest investment-grade (IG) sovereigns to announce significant relaxation to border measures. Economic momentum broadly remains healthy, with inflationary expectations uneven across Asia. Flexibility and selectivity will remain the watchwords for the rest of the year. With strong fundamentals anchoring the market, Asia fixed income should offer investors the stability that may be lacking elsewhere.

To read the viewpoints of PineBridge’s senior investment leaders, visit 2022 Midyear Investment Outlook: Inflation Surges Amid a Perfect Storm for Markets.

 Authors, from left to right:
Cynthia Chen, CFA, is an equity portfolio manager,
Arthur Lau, CFA, is head of Asia ex Japan Fixed Income, and
Elizabeth Soon, CFA, is head of Asia ex Japan Equity at PineBridge Investments.

This is a sponsored article from PineBridge Investments.

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