Asia markets’ return to confidence further supports a dynamic asset allocation approach

The sustained recovery of Asia’s economies in the first half of 2023 has led to an upward trajectory for capital markets. However, as the initial effects of the post-pandemic reopening waned, uncertainty looms over the region's economic rebound in the second half of the year. The influence of global policy rates on economic growth is becoming apparent, whilst manufacturing activity in Asia slowed. These developments have led to diverging market views, which may aggravate volatility and contribute to erratic market movements. Consequently, it is expected to be more challenging to navigate the investment markets and investors will need to be mentally prepared for such fluctuations.

Another double whammy for stocks and bonds not in the cards

Fortunately, the inverse correlation between stocks and bonds has resurfaced, diminishing the possibility for another rare double whammy of steep slumps for both asset classes, like the one seen in 2022.

Given the complicated and ever-changing macroeconomic landscape, no single asset class can consistently outperform so there is a need to maintain a diversified investment portfolio. Constructing a portfolio that includes high-quality bonds to generate stable income, alongside carefully selected stocks from various Asian markets, can help investors better position themselves for capital appreciation opportunities while effectively managing and diversifying risks. They can then better navigate through periods of market volatility.

Overall, we are more positive on bonds than equities. We expect investment-grade bonds, high-rated government bonds (including Asian government bonds), and credit bonds to offer reasonable and stable returns as credit spreads stabilise. Select Chinese credit, along with Southeast Asian or South Asian bonds (such as Indian sustainable energy and infrastructure bonds), look appealing.

Looking ahead to the second half of 2023, our outlook for Asia's overall economic growth remains neutral to optimistic. We maintain the belief that China, as the largest economy in the region, is on track to achieve its annual economic growth target of approximately 5% for 2023.

China’s real estate bailout is key to market outlook

At present, the main challenge facing the investment markets in mainland China is lagging consumer confidence, primarily influenced by the slower recovery of the domestic real estate market. Given that real estate investment constitutes a significant portion of the overall wealth of mainland China households, their caution towards spending and investing more is understandable when the future of the housing market looks uncertain. We are closely monitoring the measures that could support the real estate market that the authorities plan to implement. We believe that these policies may play a crucial role in further driving China’s economic recovery.

Furthermore, the market is also closely watching the People’s Bank of China’s monetary policy stance. We do not foresee a significant risk from inflationary pressures in mainland China and we believe there is still potential for further monetary policy easing.

Three potential catalysts for Asian stocks

We maintain a "neutral" outlook on global stocks, primarily driven by the resilience of labour markets and the services sectors, which have contributed to the delay in a cooling economy. However, due to ongoing uncertainties and the absence of a clear macroeconomic trend, we would refrain from increasing our position in equities for now. Nonetheless, our long-term optimism in the asset class remains intact. We have identified three factors that could potentially benefit Asian stocks.

Firstly, Asian corporate earnings growth is demonstrating a positive trajectory. Initial concerns about the adverse impact of inflation and high interest rates on corporate profits have mitigated, as companies have managed to improve their earnings. Part of the reason is that companies have been able to pass on rising costs to consumers to some extent. Positive earnings announcements will help further restore investor confidence.

Secondly, the valuations of China A-shares and Hong Kong equities remain attractive. If mainland China implements economic stimulus policies that effectively bolster investor confidence, these stocks can potentially catch up in the second half of 2023. The Japanese stock market also stands out, spurred by an improving local economy. However, given recent gains, investors may want to stay cautious and refrain from significantly adding exposure to the market.

Furthermore, mainland China's policy support for strategic industries is poised to overtake the real estate sector as a major driver of economic growth. Noteworthy sectors include new energy vehicles, renewable energy, consumer services and semiconductors. Backed by national policies, these industries are expected to present a more stable outlook and play a pivotal role in China's future economic development. Investors can closely monitor these sectors for potential investment opportunities.