What have been the key drivers over 2022?

The US Central Bank has taken an aggressive approach to interest rate hikes in an effort to help control inflation, which has led to tightening of global liquidity.

The stagflationary environment is extremely difficult for most financial assets. Both bonds and equities have generally delivered negative returns concurrently. Commodities benefited from the supply shock in Q1, however gave up some of the gains in the second half of this year.

What are the key themes expected to drive Asia markets in 2023?

Our analysis suggests that the US economy must enter a recession in order to defeat inflationary pressures. We are looking for unemployment in the US to rise sufficiently to create lower wage inflation so that the Federal Reserve can pause interest rate hikes and even cut rates. The US Federal Reserve pivot would be very positive for most financial assets.

The easing of the zero-covid policy in China would be very positive for markets globally, while stimulus programmes to support the embattled China property market, one of the key drivers to China’s economic growth, would also be positive for markets.

Geopolitical risks will likely remain a focus for investors. Markets have already priced in a fair amount of concerns on the geopolitical front, the key is to watch for any unexpected changes.

What areas of the Asia market does the team see opportunities going into 2023 and why?

The US Federal Reserve has been reiterating its commitment to reducing inflation and we have had the first downside surprise to the monthly US CPI number, all of which reduced the potential for interest rate volatility. We see opportunities in Asia high yield debt and local emerging market debt to benefit from attractive yields. We also like commodities where supply is running tight and demand could benefit from China’s reopening.

We are currently neutral on equities as we look for a tactical window where greater interest rate stability takes the pressure off equity valuations. Nevertheless, we remain cautious on the equity outlook heading into 2023 due to recessionary risks.

Recessions tend to offer greater buying opportunities for growth assets. We are watching very closely for re-risking signposts such as corporate earnings trough, labour market weakness and the US Federal Reserve interest rate pivot, to take advantage of potential bottoming out in equity markets.