HONG KONG / SINGAPORE – Compounding the ongoing rate hike pressure, Russia-Ukraine development, and pandemic-related supply chain distortions, the narrative around inflation has been taking over the headlines in the first half of this year. In the short term, these continue to be major concerns for investors, causing a slowdown in global economic growth and adding risks for a stagflation environment.
As slowdown in growth exacerbates, it is expected that the Fed will focus on growth concerns over inflation in future interest decisions.
Sue Trinh, Head of Global Macro Strategy, Asia, Manulife Investment Management, said: “On the back of the June FOMC meeting, we have revised our view to incorporate a frontloaded Federal Reserve tightening path ahead. We continue to believe the ‘Recession’ or ‘Not-a-Recession’ call is far less relevant versus the duration of weak growth momentum. We see an uneven picture on inflation as surges in food and energy prices are likely to remain high, with other metrics declining.”
“Meanwhile, we expect the Fed to begin an easing cycle in 2023, but reassessment of the ‘central bank put’ for markets may be in order. The risk to our view is that stagflationary dynamics are stickier for longer, especially when we consider the historical patterns to investing under different regimes.”
“We maintain our view that the global economy could experience a significant growth slowdown in 2022. With global GDP falling further below trend and leverage having risen to record, investors should be more selective to find economies that are the least vulnerable to the potential demand and supply shocks. We think Malaysia, Vietnam, Taiwan, Australia, and New Zealand are likely to be the biggest beneficiaries within the region from both the food and energy shock as well as a potential liquidity shock.”
Asian Fixed Income: Resilient opportunities in diverse Asia
Murray Collis, Chief Investment Officer, Fixed Income, Asia ex-Japan, Manulife Investment Management highlights some of the economies in Asia that may offer pockets of opportunities for fixed income investors, especially after US Treasury yields retracing to higher levels from pandemic lows.
“We expect to see a greater diversity in the pace and magnitude of monetary policy tightening across the region, and when compared to the Fed and other developed-market central banks, generally a less hawkish central bank stance should support selective Asian credit markets. We expect idiosyncratic risks to a certain degree remains in Asian credit markets for second half of 2022, however investors are more compensated with Asia credits offering relatively attractive valuations post US Treasury yield movements year-to-date; for example some Asian investment grade corporate issuers are offering yields of around 5.5% on average whilst Asian high yield corporate issuers are offering yields of around 12% on average1, after the correction among global credits spurred by rising macro headwinds and weak sentiment globally.”
In China, Politburo pledged to step up policy support and more cities announced property policy relaxation are positive developments for the slowing economy. We think those policy measures have showed early positive impact on China’s physical property sector, we expect to see more stimulus measures from the central government around the China property sector in second half of the year.
In addition, we believe Southeast Asia has emerged as a potential bright spot amid rising stagflationary fears from global investors, as several markets have recorded faster-than-expected GDP growth. This is due to a pick-up in tourism, re-opening of economies, and strong commodity exports. The faster growth boosts consumption in some Southeast Asian economies, which the pace of growth could potentially outpace inflation. Such expectation contrasts with some developed markets that face growing stagflation and recessionary risks.
With the green finance revolution taking place in Asia, Murray Collis comments on the trend of rising regional issuance of ESG-themed bonds, and how this segment demonstrates compelling opportunities.
“In 2022, about two out of every five US dollar Asian credit new issues were ESG bonds, which reflects the strength of dedicated demand to ESG bonds despite the volatile market environment. Some regional governments have also fast-tracking plans to issue their first green bonds as numerous countries have made ambitious ‘net zero’ pledges over the past year. One example is Indian renewable energy credits, of which the country seeks to improve energy self-sufficiency and meet its net zero emissions goal by 2070.”
Asian Equities: Opportunities are expected to re-emerge in structural growth names
The performance of Asian equities over the first half of 2022 was put under pressure by a combination of factors such as tighter monetary conditions, the prospects of slower global growth, geopolitical events, and adverse regulatory interventions in China. Marco Giubin, Senior Portfolio Manager, Equities, Manulife Investment Management analyses the factors that will continue to impact Asian equity markets and the potential investment opportunities that may arise amid the pressure.
“With the de-rating in valuations among Asian equities behind us, Asian market valuations are now close to trough levels. We believe that the bulk of the de-rating in Asian equities has transpired, and we see limited scope for further meaningful de-rating based on our assumptions.”
“In terms of earnings, the downward pressure on margins was largely driven by high commodity prices and supply chain disruptions. The commodity complex since mid-April has seen a meaningful correction after having risen substantially in the preceding 12 months. Consequently, in Q3 2022, we may start to see a combination of higher pricing and lower input costs alleviating margin pressure. In addition, input cost pressure related to supply chain disruptions is also forecast to alleviate.”
“The unwinding of margin pressure creates other opportunities in sectors where companies have been excessively de-rated on trough margins. However, we should focus on companies whose top line is relatively resilient to a slowdown in global demand. We continue to look for structural growth names as we believe that the scarcity of growth will re-emerge as a focus after the market gains clarity as to when interest rates peak. For instance, the renewable energy space, the supply chain of electric vehicles, and energy storage systems are areas that should exhibit long-term growth characteristics independent of economic cycles.”
1 Source: Manulife Investment Management, 30 June 2022