- Contrasting or parallel economic worlds of the East and West are set to continue as China reopens in the face of increasing recession risk in the US and Europe.
- The scope for rebound in China is significant, with excess savings at around three per cent of GDP. We expect the spillover effects to be an Asia story and see three particular facets of the recovery that will matter for the region.
- Finding new means of portfolio resilience has risen to the forefront of investor concerns given stock/bond correlations turning positive last year. The opportunity set in the region is large, with notable benefits for investors.
Parallel worlds to persist
The cyclical outlook for Asia continues to contrast with that of the West. An expected period of disinflation and recession in the West will not inhibit specific tailwinds for economic activity in Asia. China’s reopening clearly serves as the biggest potential growth support, making it a central theme for investors.
A compelling picture for asset allocators
The opportunity set in the region is large with notable benefits for investors. For instance, the declining beta of Asian equities versus the West, and the US in particular, adds to their value within portfolios. More muted fluctuations relative to US stocks can allow investors to improve portfolio resilience by diversifying through Asia.
Asia fixed income – higher yields and lower duration
Asian corporate bonds remain an area of the markets that we favour, offering a solid income opportunity with higher yields relative to developed and broader emerging markets. Furthermore, interest rate risk is lower in Asia compared to developed markets bonds – for both investment grade and high yield. While some compression in yield spreads over developed markets has already occurred, we still think there is scope for further compression to drive returns going forward, particularly in high yield where spreads remain relatively wide.
Asia equities – diverse opportunities across the region
Today’s potential goes beyond a China retail recovery story. The resumption of more normal activity levels, border reopening and the boosting of economic confidence should support growth across sectors. We see strong opportunity for a recovery in technology and semiconductors in Asia. Market sentiment has already turned positive since January in areas such as consumer electronics, with recent strength in China smartphone sales driving inventory destocking.