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Second Half 2017 Market Outlook — Favourable Tailwinds to Support Growth in Asia

HONG KONG, 11 July 2017 — Global growth reaccelerates in 1H 2017. The continued upward trend in key global economic indicators, inflation edging lower and global trade recovery provide favourable tailwinds for a balanced and supportive growth trend for Asia in the next twelve to eighteen months.

We anticipate the healthy recovery seen in corporate earnings among US and global companies to continue through the second half of 2017 and into 2018. S&P 500 earnings in the first quarter of 2017 grew by 14% and revenue growth rate of 7.6%1. The unemployment rate in the U.S. now sits at 4.3%, which is the lowest level in over 16 years2. Meanwhile, despite these firm trends in the economic data, investors remain concerned about a number of developments that might hinder the pace of economic recovery, such as the slow introduction of new economic policies in the US, geopolitical instability in the Middle East and upcoming general elections in Italy and Germany.

Geoff Lewis, Senior Asia Strategist at Manulife Asset Management, said: "Despite global political turmoil having been the overarching theme in 2017, driving a heightened sense of uncertainty among investors, the global economy is quietly gaining rather than losing momentum. We expect monetary policies among the world’s largest economies except the U.S. to remain accommodative throughout the year – indeed, the combined debt issuance of G3 central banks in 2017 will be negative for a third year in succession. Governments are also expected to support activity in their economies via less austerity and increased fiscal spending. From an investment perspective, a subdued US dollar, low inflation and a relatively cautious, data dependent Fed would provide a favourable environment for emerging debt and equity markets, including those of Asia. We advise investors to stay invested but to rebalance their portfolios in line with strategic preferences where necessary in cases where strong first half returns have caused equity weights to drift higher. In the US, we welcome the repeal of some of the more onerous post Financial Crisis banking regulations,which would lead to an increased willingness by US banks to lend, thereby supporting a continuation of the economic expansion."

Stay Actively Investing in Greater China and Asia Equities

Year to date, Asia ex Japan equities have outperformed their developed market peers. The MSCI Asia ex-Japan index has gained 22.56% compared to 9.88% for the MSCI World Index (developed markets)3 based on three favourable factors: 1) positive earnings revisions in Asia; 2) the region’s economic environment remains supportive; and 3) political developments in Asia have been relatively stable when compared to the US and UK.

Asia is leveraged to global growth and we are seeing a cyclical uptick as evident by the momentum from exporters. Exports in South Korea and Taiwan have reached multi-year highs over the past few months on the back of increased demand for electronics. Economic conditions remain stable in Greater China amid the improving global conditions. Corporate profits continue to rise and as a result, we have seen equity markets continue to show positive momentum. Under the backdrop of an improving macro-economic environment in the US and Europe, the better-than-expected performance of China’s Purchasing Managers’ Index (PMI) and corporate profitability, we are optimistic on the outlook of Greater China equities.

Ronald Chan, Chief Investment Officer of Equities Asia (ex-Japan) at Manulife Asset Management, commented: "Regional Asian GDP growth is expected to far outstrip that in the US and Europe over the coming years. We expect second quarter earnings to moderate but growth will still be supportive. Despite solid performance and robust capital inflows, Asian equity markets’ valuations illustrate dispersion, meaning that investors can still capture opportunities through active investment. Investment opportunities could also be found by other significant initiatives such as The Chinese government’s Belt and Road Initiative. It will not only benefit industrial firms in China, but also infrastructure, engineering and transport firms in partnering countries in the region."

Strategic Positioning to Take Advantage of Asia Fixed Income Opportunities

In the past few months, Asian fixed income extended its rally as capital inflows continued into emerging markets year-to-date. Flows have also increased into Asian fixed income markets in 2017 after the abrupt capital outflows from the region following the 2016 US presidential election. With major uncertainties in the horizon, more defensive investors could find relative comfort in fixed income.

Many Asian sovereign bonds currently show a lower level of risk than over the past four years. A majority of regional sovereign credit default spreads (CDS) are close to their lowest level since 20134. As spreads have come down, prices for most Asian sovereign bonds have been well supported. We are still constructive on India and Indonesia in the region, particularly after Indonesia’s credit upgrade, as both markets offer higher yields and better potential returns compared to other markets.

Endre Pedersen, Chief Investment Officer of Fixed Income Asia (ex-Japan) at Manulife Asset Management, said: "Amidst changes and risks in the region, we still see some fixed income opportunities in China and wider Asia. Valuations in the region have risen and credit spreads tightened along with continued capital inflows, and in some areas, valuations have risen beyond fundamental values."


1. S&P Capital IQ, FactSet, June 2017.
2. Bureau of Labor Statistics, 2 June 2017.
3. Bloomberg, as of 8 June 2017, price returns in US dollar.
4. IMF Regional Economic Outlook: Asia and Pacific May 2017; Bloomberg.