Where can investors find the sweet spots in Asia?

Over the past few weeks, global equity markets moved downward as investors continued to digest the impact of the Ukraine crisis. Asian equities were no exception.

US 5-year and 10-year Treasury yields rose to their highest level in almost 3 years, ahead of the first Federal Reserve’s rate hike from a widely anticipated series that aims to help manage inflation. Western sanctions on Russia not only led to commodity price hikes, but also raised further concerns over rising inflation.

Driven by higher global energy prices and ongoing cost pressures stemming from supply bottlenecks, we expect the economic environment will still be distinctly stagflationary over the short to medium term.

Tug of war between growth and inflation

Whilst the geopolitical situation is causing further supply disruptions, deterioration of growth-inflation trade-off is likely to continue. This has posed a challenge to central bank policies. The Federal Reserve is expected to press ahead with its rate hikes as inflationary pressures are broad-based in the US economy.

With the revival of lockdown in China casting a shadow over the country’s growth prospect, the outlook for global growth seems equally challenging. A more cautious and diversified approach is warranted to navigate the market volatilities. With the uncertainty looming large, we continue to manage our positions nimbly while being cognizant of various risks and downside.  

Capturing Asia’s secular growth opportunities

Given the uncertain outlook for growth and inflation, diversification remains crucial to Asian investments.

While earnings growth expectation for 2022 is still positive, there are several headwinds ahead, including: (1) slowing economic growth in China, (2) margin impact from rising input costs, and (3) economic impact from subsequent Covid-19 infection waves. Therefore, sector growth for 2022 is unlikely to be as strong as what was seen in 2021.

However, we continue to see decent earnings visibility across pockets of the technology supply chain. Even though the work-from-home theme has largely played out, the momentum within sectors such as 5G, mobility, EVs, Cloud, Internet of Things, and the emerging metaverse are still driving technological innovation and proliferation of new technology products. We also think that some Chinese mining companies have the potential to perform as the copper division stands to benefit from ongoing tailwinds of new economy applications like EV cars and technology products.

Meanwhile in Singapore, up to 75% of staff are allowed to return to offices under the new relaxed Covid-19 policies. Therefore, we are seeing opportunities in the country’s office and commercial real estate investment trusts (REITs) that are set to benefit from improvements in mall and office traffic. Such assets may offer a hedge against rising inflation, as well as stable and attractive dividend yields. 

From a longer-term perspective, we are focused on identifying companies that are set to benefit from secular growth. Overall, maintaining a healthy level of diversification across companies with structural growth and attractive dividend levels will be a good way to capture market opportunities.

Quality credit selection to navigate market volatility

For Asian credit, we are taking a defensive stance. Apart from the devastating impact of the Russia-Ukraine situation, the Fed’s hawkishness and the downturn of the Chinese property space are still amongst investors’ concerns.

The valuation of Asian investment-grade credits is supported by overall stable and improving fundamentals. Yet, the segment plagued by negative headlines is driving heightened credit divergence across sectors and issuers.

While China is experiencing policy reformation, pressure from Covid-19 infections and therefore supply chain disruptions, and, the simmering US-China trade tensions may further add to the uncertainties. Furthermore, the persistent inflation pressure might push the rate trajectory upward unexpectedly. Although the impact has so far been muted on most corporates in credit markets, investors should be mindful of the potential risk factors in the months ahead.

Compared to other emerging market regions, Asian credit is likely to stay relatively resilient given its higher quality composition and lower susceptibility to global fund flows due to its larger domestic investor base. We also think that credit valuations look attractive historically and relative to global corporates. So, it really boils down to selecting credit of quality to mitigate portfolio risk and volatility.

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