2022 Midyear Asia Multi-Asset Outlook: Reopenings Offer Pockets of Value


2022 Midyear Asia Multi-Asset Outlook: Reopenings Offer Pockets of Value

The invasion of Ukraine in February and the subsequent supply constraints in everything from oil and gas to wheat and fertilizers left Asian economies more vulnerable to inflation than they were at the start of the year. Inflation and the Fed hiking cycle have put pressure on Asian central banks to tighten more aggressively, with the stark exception of China, where rates are moving in the opposite direction. (See our Global Midyear Multi-Asset Outlook for further insights.) Asian central banks have lagged their counterparts across emerging markets, such as Latin America and Central and Eastern Europe, in the rate hike cycle. Most of these other countries started hiking in 2021.

That said, for the most part, the rise in prices has been moderate compared to Western developed economies, with the exception of India and Thailand. India’s inflation reached an eight-year high in April, while Thailand’s accelerated to a 14-year high in May due to oil prices. The Reserve Bank of India undertook a hawkish policy repo rate hike of 50 basis points (bps) in June and has signalled more measures to come if inflation remains outside its target range.

Inflation Catches Up With Asia But Is Largely Rising Moderately

Inflation Catches Up With Asia But Is Largely Rising Moderately 

Source: Year data from Asian Development Bank, monthly 2022 data from Reserve Bank of India, Hong Kong Census and Statistics Department, National Bureau of Statistics of China, Statistics Korea, Bank Indonesia, Ministry of Commerce Thailand, Monetary Authority of Singapore and Ministry of Trade and Industry, General Statistics Office Vietnam, Department of Statistics Malaysia, and the Philippine Statistics Authority, as of 30 June 2022.

Governments, including India, are responding to rising prices with tax cuts and subsidies. The downside to this is a potential increase in the debt burden and a weakening of fiscal balances. The International Monetary Fund has raised concerns about potential deterioration in the likes of Thailand and the Philippines, where the debt-to-GDP ratio exceeded 60% at the end of the first quarter. Meanwhile, Indonesia’s cap on electricity and fuel prices may have helped moderate inflation, but it is still on a rising trend. Other places like Singapore and Korea also are feeling inflationary pressures, which means they will continue to tighten policy, and rates there remain sensitive to the Fed rate cycle.

Asia’s outlook rests on reopenings

China’s shift toward stabilizing growth is a bright spot in the global economy today. However, this and the country’s ramped-up stimulus will put to rest transitory hopes for a Fed pause or peaking of inflation. With its outsize demand, China’s reopening should pressure oil and industrial commodities higher. Core inflation should also start showing signs of peaking (with stickier and steadier secular rises in services inflation offsetting much of the cyclical declines in goods inflation) along with an acceleration of headline inflation.

We find China equities fairly valued, but we believe the stocks are likely to benefit from a cyclical period of strong fundamental improvement, making their risk-reward somewhat attractive in a world where this can be said for fewer and fewer types of equities.

Japan is another key conviction. Equity valuations remain attractive, and as the country opens up to tourists and restrictions ease, we would expect some support to growth.

We believe there is opportunity in Chinese property bonds. However, it is important to be selective and focus on the higher-quality bonds. Chinese property bonds higher up the quality spectrum continue to offer compelling yields and should stand to benefit from the government’s easing policies.

The combination of slowing global growth and tightening financial conditions with stubbornly high inflation is generally not conducive to risk-taking. However, at a time when major asset classes are under pressure, Asia offers an oasis of improving sentiment from economic reopenings and a likely pickup in cash flows in China in the intermediate term.

For more investment insights, visit our 2022 Midyear Investment Outlook.


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