24 June 2021

2021 Asia Midyear Multi-Asset Outlook: Positioning for the Next Phase of the Cycle

  • Exports have led the recovery in Asia and will drive growth while consumption lags.
  • Globally, we believe we’re entering a phase of sustained growth, improving fundamentals, and rising markets, albeit all at a slower pace. Inflation and corporate investments will be key in this next phase.
  • Our equity convictions in Asia focus on Japanese equities, where markets combine relatively attractive valuations with high beta to global growth, and we see big improvements in fundamentals ahead as vaccinations unfold.
  • In fixed income, we particularly like emerging market (EM) corporate debt while being selective on high yield EM hard currency sovereign debt. We continue to find Asian IG credit attractive.
2021 Asia Midyear Multi-Asset Outlook: Positioning for the Next Phase of the Cycle

While Asia continues to deal with the pandemic, the region’s markets continue to benefit from the global upturn, thanks to their cyclical nature. This has meant that the region is running on a two-speed recovery: Externally oriented sectors are rebounding strongly, while domestically oriented sectors and other consumer-related sectors continue to lag. Exports have led the recovery, benefiting economies like South Korea, Taiwan, and China, which are exporting crucial capital goods, commodities, and electronics. Asia’s balance sheets are robust and will likely be unleashed once more people in the region are vaccinated and economies fully reopen. Until then, growth will be fueled by the external sector, but the worst is likely behind the region as a whole.

Asia Exports Are the Key Support for Growth

Asia Exports Are the Key Support for Growth: Strong Rebound in 2021

Source: Macrobond as of 1 May 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

Globally, we believe we’re entering a phase of sustained growth, improving fundamentals, and rising markets — albeit all at a slower pace. In other words, it’s an environment that generally rewards taking some risk, but to a lesser degree, and thus positioning in the right assets for this shift is critical.

Twin influencers

Two factors will be key in the next phase of the cycle: inflation and corporate investments.

With the US consumer price index (CPI) rising to multi-decade highs, the path of inflation will be critical, as will the size and duration of monetary and fiscal support “post-reopening.” The key risk is that inflation exceeds expectations for longer or to a greater extent than expected, forcing central banks to overcorrect and potentially trigger a downturn. This will be crucial for the likes of India, which has often battled with inflationary pressures. In addition, emerging market (EM) central banks will feel pressure to keep up with the Federal Reserve when it comes to removing stimulus to avoid increased pressure on their currencies. Central banks in the region (including Bank of Korea, Bank of Thailand, and Bank Indonesia) have experimented with quantitative easing and are able to do so as inflationary pressures remain subdued. Underlying disinflationary pressures already persist for Korea and Thailand as they face demographic challenges similar to those in Japan.

Persistent and longer-lasting inflation will be a true test for central banks in the region as they aim to strike the right policy balance between supporting growth and managing inflation. Indonesia abandoned its fiscal deficit cap to ensure a stronger recovery, as monetary policy will not be sufficient after such a deep recession. Policymakers continue to see structural reforms as an important tool to accelerate growth. Another key support that cements our view that inflation will be persistent but ultimately transitory is China’s position in its policy cycle. While the US has its foot on the gas in terms of monetary and fiscal policy to stimulate growth, China is pumping the brakes.

The path of corporate investment is also critical in supporting growth in this next phase. The pandemic has accelerated trends such as digitization and decarbonization, which are driving capex across multiple global sectors. In addition, the policy mix appears to be shifting markedly from monetary to fiscal dominance. China is at the forefront of the decarbonization push, looking to achieve carbon neutrality by 2060. Korea plans to invest US$144 billion in a digital New Deal as well as a Green New Deal. (The term “New Deal” originally referred to a massive economic relief program and reforms in the US between 1933 and 1939 as the economy struggled to climb out of the Great Depression.) The latter focuses on renewable energy, green infrastructure, and the industrial sector. Moreover, Singapore is set to issue approximately US$14 billion in green bonds to fund infrastructure projects, while neighboring Indonesia is looking at ways to improve its regulatory framework to attract green investment.

Asset allocation views: opportunities in Asia

Broadly speaking, with growth rates set to decline over the coming nine to 18 months, we believe equities and commodities may offer less attractive return potential relative to credit assets. We foresee a constructive reflationary regime with still-strong nominal GDP growth in the US (which should spill over into Asia) and continued supportive monetary and fiscal policy, and would be inclined to buy any dips. And while we see the Fed’s taper talk as a broad headwind, it could particularly lead to increased volatility across emerging markets, including Asia.

Equities: big on Japan

Our global equity approach has incorporated a focus on “following the vaccine” as a signal of where growth-sensitive assets will perform best. In Asia, our focus is on Japanese equities, where markets combine relatively attractive valuations with high beta to global growth, and we see large improvement in fundamentals ahead as vaccinations unfold. Japan will also benefit from spillover of fiscally driven US growth without the need for higher taxes and regulation. However, we continue to view Korea and Taiwan equities as unattractive from a valuations perspective. While China equities are attractive in terms of valuations, we are cautious given the normalization of policy and slowdown in growth over the next nine to 18 months.

Fixed income: Asian IG looks compelling

Among credit assets, the most attractive are in emerging markets. We particularly like EM corporate debt and are selective on high yield EM hard currency sovereigns. We view these as a stable allocation because they offer positive real yields and have lagged other credit assets, which means they have further to run and provide an attractive yield contribution to return. We continue to find Asian investment grade (IG) credit attractive and expect the China Huarong case to be resolved without broad repercussions. Nonetheless, we have reduced exposure to other Chinese credits due to unfavorable risk compensation, in favor of more attractive risk/reward in other segments of Asian credit.

Alternatives: renewables take their spot

Fundamentals of renewable energy stocks should confirm their multi-year growth spurt. Investment in renewables in Asia is being prioritized as countries set carbon neutrality goals. We remain focused on wind and solar stocks due to their price competitiveness and anticipated government funding for capacity buildouts. Meanwhile, we are negative on commodities as we consider this a highly growth-sensitive asset class that is vulnerable to a correction. Copper may be an exception, where we see a strong longer-term growth story and a potential supercycle, given its integral role in many green technologies. That said, given China’s slowdown and a recent price surge, a correction in copper in the next few months would not come as a surprise.

For more economic and investment insights, visit our 2021 Midyear Investment Outlook page.


Disclosure

Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any republication of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.

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