27 Oct 2022
With recessions looming over most developed markets, Asia is marching to a different beat this winter. Against this backdrop, Global CIO Andrew McCaffery explains why Asia’s key economies serve as a useful diversifier, with more policy certainty potentially coming from the Chinese Party Congress this October.
Asia’s benign inflation backdrop compared with the West means that its central banks can afford to be more accommodative, as demonstrated by the surprise cuts by the People’s Bank of China at the end of August. We expect China’s monetary policy to continue easing in the near term, supporting recovery from zero-Covid policy and the distress related to property sector reform and other common prosperity initiatives.
Japan also appears committed to its policy of extremely low rates, although we are closely monitoring any potential changes in its yield curve control (YCC) regime. Any shift away from YCC could lead to unintended consequences for the Japanese yen and potentially add another layer of risk to the already extraordinary level of volatility in FX markets, which has already prompted intervention from the BoJ last month.
As Europe and the US wrestle with tightening policy and potential recession, activity in China has been improving, albeit the path has been halting. We believe sentiment could improve further following October’s 20th party Congress. While President Xi is likely to retain all his leadership positions for an unprecedented third term, adjustments in other leadership ranks could offer clues for the forward path of economic policy and serve as a catalyst for a more progressive growth policy.
Expectations heading into the Congress remain muted, meaning any positive news around leadership positions or zero-Covid policy could provide an immediate boost to sentiment. We also expect Chinese earnings to improve, as companies begin to enjoy a post-Covid recovery and lower commodity prices.
Southeast Asian commodity producers like Indonesia and Malaysia are stepping in where possible to fill global shortages triggered by the war in Ukraine. Economic reopening has contributed to strong recovery in the Asean block, which also benefits from manufacturers relocating outside of China. Exporters across the region are benefitting from dollar strength; Japanese firms, for example, will profit from the yen being at its weakest level in more than two decades, despite migration of production overseas in recent years. Finally, areas of Asian technology which had previously been undervalued may start to see fresh opportunity. Asean countries are on track for 2022 growth rates among the highest globally, further reinforcing our brightening view on Asia asset classes as we close out 2022.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Investments in emerging markets can be more volatile than other more developed markets. Changes in currency exchange rates may affect the value of investments in overseas markets. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Due to the greater possibility of default, an investment in a corporate bond is generally less secure than an investment in government bonds. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of investments. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only.