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Market Outlook 2017 — Asia expected to remain the world's growth engine despite increasing global macro uncertainty

SINGAPORE, 14 December 2016 –Growth in emerging markets in Asia are expected to continue to offer opportunities for investors in 2017 amid ongoing global political and market uncertainties.

Despite considerable political uncertainties in the near term in the US, the UK and Europe, as well as potential changes of the US trade policies after the new president is on board in January 2017, modest improvement in global economic momentum is expected to continue in the year ahead.

Potential introduction of trade protectionism may derail the Trans-Pacific Partnership, which could pose an impact on global growth. Investors may also see a gradual rise in inflation, flatter yield curves and a higher Fed funds rate in 2017. This may translate to a more cautious stance by the Asian central banks due to market volatility. Nevertheless, with long-term interest rates in advanced economies expected to remain low in the year ahead, growth and strong fundamentals in the Asian market will present opportunities to those investors willing to diversify across asset classes and geographies.

Against this global backdrop, opportunities can be identified in riskier, higher yielding asset classes, including Asian equities, which can offer better returns for investors seeking to manage market volatility.

Geoff Lewis, Senior Asia Strategist, Manulife Asset Management said, "Despite ongoing political uncertainty following Brexit and the outcome of the US Presidential Election, we’re cautiously optimistic about the year ahead. US fixed investment is expected to pick up, global monetary policy is likely to remain accommodative which will alleviate pressures on the equity markets. There are significant opportunities in Asia for investors. The region hasn’t been immune to the challenges facing the global market economy, but it’s still the highest quality emerging market in the world and is likely to draw increased interest in 2017."

Capturing Asia Fixed Income Opportunities amid Downside Risks

Volatility in rate, credit and currency markets will remain in 2017. The outlook for Asian fixed income would also depend on Trump's presidency in implementing the trade and fiscal policies, as well as their potential implications for the US and global growth, rates and monetary policies. The pace and magnitude of Fed’s rate hike will also have a bearing on Asian fixed income.

Asian economic fundamentals are expected to remain stronger than other emerging markets in the year ahead. Over the past ten years, a rating upgrade trend was seen for most Asian countries to achieve investment grade status. Countries in the region also have stable economic growth, stronger balance sheets, and a better macroeconomic position than in previous years. In 2016, credit spreads have remained tight and some local currency markets have seen some dramatic sell-off. Opportunities may arise in local markets if and when stability in global rates and currency markets is seen, and when corporate bond spreads widen.

The latest Manulife Investor Sentiment Index (MISI)* shows that investors in Singapore think there are opportunities in the fixed income asset class in 2017. More than three quarters of the respondents (77%) think it is a "neutral to good time" to invest in fixed income.

Endre Pedersen, Chief Investment Officer, Fixed Income, Asia (ex-Japan) said, "Against the backdrop of ongoing market volatility, there is still a role for fixed income investment as part of a diversified portfolio. Fundamentals for Asian fixed income are still there and supportive. Looking ahead in 2017, if the credit spreads widen and stability of rates and currencies kick in, there will be potential to generate positive returns in some local markets."

Murray Collis, Head of Fixed Income, Singapore, Manulife Asset Management, added, "For 2017, Singapore dollar corporate bonds look to remain well-supported due to the limited supply from high quality issuers and firm demand from real money investors. Meanwhile, Singapore government bond yields are expected to trend slightly higher in tandem with US treasury yields. Sharp sell-off is, however, unlikely given accommodative monetary policies by most major central banks."

2017: A Turning Point for Asian Equities

For Asian equities, the year 2017 looks to be a turning point, bearing opportunities to investors. Whilst Asian stocks have suffered from earnings downgrades in recent years, positive earnings revisions are starting to surface given an improving economic environment with supportive fiscal and monetary policies.

More broadly, capital flows, exchange rates and bond spreads across most of the region are expected to continue to stabilise in 2017, creating a more positive macro-environment for equities. Real effective exchange rates in Asia are also now much more competitive, pointing to a lower vulnerability of Asian stocks to future interest rate increases from the US Federal Reserve.

Among the Asian markets, opportunities may appear in China equities, as evidenced by the improving private investment landscape and the first positive Producer Price Index (PPI) reading in 55 months, putting more fuel on its reflation. North Asian markets, such as China, South Korea, Taiwan, are expected to outperform in the first half of 2017 due to fiscal stimulus and increased economic activity in the US. As elections in Europe and new policies from the US may result in increased volatility in global markets in the second half of 2017, Southeast Asia will look to outperform given that these economies are driven by domestic consumption and policies.

Ronald Chan, Chief Investment Officer, Equities, Asia (ex-Japan), Manulife Asset Management commented, "We believe 2017 could prove to be a turning point for the Asian equity universe, particularly if China’s gradual economic rebound presents positive knock-on effects for other regional economies. As the economic outlook brightens, valuations are also expected to improve, which could offer significant gains for investors. At Manulife, we see constructive opportunities in Indonesia, China and India equities."

Lisa Yong, Head of Equities, Singapore, Manulife Asset Management, added, "For Singapore, it is expected that the equity market will continue to take its cue from global macro-events heading into 2017. Corporate earnings cut is likely to bottom out and market valuation relative to history is inexpensive. Stock-picking remains important for out-performance with focus on companies with ability to drive earnings turnaround or sustain attractive dividend payouts."