There is growing consensus among asset managers that Asian equities are well-positioned against global recession despite the continuing market volatility and geopolitical uncertainties.
One reason is that Asian equities are currently trading at historically large discounts against their developed-market counterparts. Also, there’s positive progress in the reopening of Asian economies in the wake of Covid-19, and the investment outlook for the region is improving.
“While no market will be entirely immune to valuation pressure from rising interest rates, Asia could offer better protection given that Asian equities are today trading at historically large discounts to their developed-market counterparts, with several quality companies with structural growth opportunities trading at attractive valuations,” say Jin Zhang and Ian Chun, portfolio managers at Vontobel.
Zhang and Chun cite the case of Indonesia, which has built up higher foreign exchange reserves and improved its current account. The market is at an early stage of recovery from the pandemic and therefore better positioned to cushion the impact of a potential global recession.
This assessment is echoed by Dong Chen, head of Asia macroeconomic research at Pictet Wealth Management, who says emerging-market equities found some breathing room in late May after many difficult weeks, with a break in the steady decline in earnings expectations that followed the invasion of Ukraine.
Fan Cheuk Wan, chief investment officer for Asia of global private banking and wealth at HSBC, also agrees, saying: “Improved investment outlook for Asian equities and credit in the H2 2022 as moderating US inflation and Fed rate hike expectations, China’s policy stimulus, supportive Asian central banks and accelerating economic reopening in Asean should support re-rating of the Asian equity markets.”
Within Asian equities, HSBC is overweight on the Asean markets, particularly Singapore, Thailand, and Indonesia, because of the positive progress in the reopening of these markets and strong outlook for economic recovery. In North Asia, HSBC is overweight on Hong Kong stocks because of compelling valuations, and improved outlook for reopening of the economy.
For China, HSBC remains neutral pending clarity on the progress of economic normalization and in view of geopolitical challenges and earnings uncertainty.
Pictet has also reduced its 2022 GDP growth forecast for China from 4.5% to 4.0% because it expects any forthcoming economic rebound will be comparatively modest.
HSBC forecasts that global GDP growth will decelerate from 5.8% in 2021 to 3.4% in 2022 and 2.9% in 2023, while global inflation is expected to rise to 7.5% before moderating to 5.1% in 2023.
“A multitude of factors such as rising inflation, supply shocks, end of monetary easing, and ongoing geopolitical disruptions have led to a surge in economic uncertainties,” say Vontobel’s Zhang and Chun. “If the global economy is indeed heading for a recession, we believe that many countries in Asia are better positioned now than prior times to manage a potential economic downturn.”
Pictet’s Chen adds: “While European stocks look comparatively cheap, we remain neutral on both US and European equities. The former are suffering from the increase in sovereign yields while the latter face heightened risk from the current geopolitical tensions. We remain overweight the Swiss and Japanese equity markets – the former for its long-term defensive appeal, the latter for their diversification benefits.”
Fund managers, however, warn that the global situation remains fragile and investors have to cope with volatility for a prolonged period.
“As geopolitical tensions lead to increasing weaponization of assets, as already seen in energy as a result of the war in Ukraine, food looks like it will be next, as well as the threat looming over Chinese tech stocks’ US listings. Given the abundant uncertainties, we believe it still pays to be generally cautious,” says Alexandre Tavazzi, Pictet Wealth Management’s chief investment officer for Asia and global head of CIO office and macro research.
“We think that volatility will remain an investment theme – in fixed income and currencies as well as in equities. We also see the current dislocations as playing to the strengths of macro hedge funds. And the outlook is becoming more balanced for global government bonds as growth concerns rein in the scope for rate rises,” Tavazzi adds.