2021 Asia mid-year investment outlook: Positioning for the next phase of the cycle

Key takeaways

  • ​Exports have led the recovery in Asia and will drive growth while consumption lags.
  • Globally, we believe we’re entering a phase of sustained growth, improving fundamentals, and rising markets, albeit all at a slower pace. Inflation and corporate investments will be key in this next phase.
  • Our equity convictions in Asia focus on Japanese equities, where markets combine relatively attractive valuations with high beta to global growth, and we see big improvements in fundamentals ahead as vaccinations unfold.
  • In fixed income, we particularly like emerging market (EM) corporate debt while being selective on high yield EM hard currency sovereign debt. We continue to find Asian investment grade (IG) credit attractive.

While Asia continues to deal with the pandemic, the region’s markets continue to benefit from the global upturn, thanks to their cyclical nature. This has meant that the region is running on a two-speed recovery: Externally oriented sectors are rebounding strongly while domestically oriented sectors and other consumer-related sectors continue to lag. Exports have led the recovery, benefiting economies like South Korea, Taiwan and China, which are exporting crucial capital goods, commodities and electronics. Asia’s balance sheets are robust and will likely be unleashed once more people in the region are vaccinated and economies fully reopen. Until then, growth will be fuelled by the external sector, but the worst is likely behind the region as a whole.

Globally, we believe we’re entering a phase of sustained growth, improving fundamentals and rising markets – albeit all at a slower pace. In other words, it’s an environment that generally rewards taking some risk, but to a lesser degree, and thus positioning in the right assets for this shift is critical.

Twin influencers

Two factors will be key in the next phase of the cycle: inflation and corporate investments. With the US consumer price index (CPI) rising to multi-decade highs, the path of inflation will be critical, as will be the size and duration of monetary and fiscal support “post-reopening”. The key risk is that inflation exceeds expectations for longer or to a greater extent than expected, forcing central banks to overcorrect and potentially trigger a downturn. This will be crucial for the likes of India, which has often battled with inflationary pressures. In addition, EM central banks will feel pressure to keep up with the Federal Reserve when it comes to removing stimulus to avoid increased pressure on their currencies. Persistent and longer lasting inflation will be a true test for central bank policy in the region as they strike the balance between supporting growth and managing inflation.

The path of corporate investment is also very important in supporting growth in this next phase. The pandemic has accelerated multiple trends such as digitalisation and decarbonisation, and these are driving capex across multiple global sectors.

Asset allocation views: opportunities in Asia

Broadly speaking, with growth rates set to decline over the coming nine to 18 months, we believe equities and commodities may offer less attractive return potential relative to credit assets. We foresee a constructive reflationary regime with still-strong nominal GDP growth in the United States (which should spill over into Asia) and continued supportive monetary and fiscal policy, and would be inclined to buy any dips. And while we see the Fed’s taper talk as a broad headwind it could particularly lead to increased volatility across emerging markets, including Asia.

Equities: big on Japan

Our global equity approach has incorporated a focus on “following the vaccine” as a signal of where growth-sensitive assets will perform best. In Asia, our focus is on Japanese equities, where markets combine relatively attractive valuations with high beta to global growth, and we see large improvement in fundamentals ahead as vaccinations unfold. Japan will also benefit from a spillover of fiscally driven US growth without the need for higher taxes and regulation. China equities are attractive in terms of valuations, but we are cautious given the normalisation of policy and slowdown in growth over the next nine to 18 months.

Fixed income: Asian IG looks compelling

Among credit assets, the most attractive are in EMs. We particularly like EM corporate debt and are selective on high yield EM hard currency sovereigns. We view these as a stable allocation because they offer positive real yields and have lagged other credit assets, which means they have further to run and provide an attractive yield contribution to return. We continue to find Asian IG credit attractive. We have reduced exposure to other Chinese credits due to unfavourable risk compensation, in favour of more attractive risk/reward in other segments of Asian credit.

Alternatives: renewables take their spot

Fundamentals of renewable energy stocks should confirm their multi-year growth spurt. Investment in renewables in Asia is being prioritised as countries set carbon-neutrality goals. We remain focused on wind and solar stocks due to their price competitiveness and anticipated government funding for capacity buildouts.

  • For more viewpoints from PineBridge Investments’ global economic and investment teams on what to expect for the rest of year, visit pinebridge.com


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