Reopening story in Asia and renewed investment opportunity

Sean Taylor April 14, 2022 10:23

The lack of energy supply globally caused by the Russia-Ukraine situation, pressure on prices and the Fed's rate hikes, and the reopening story in Asia will continue to shape the global economy in the coming months, but there remains opportunity in selective and diversified portfolios.
At DWS, we expect Asia to outperform in the second half of the year, driven by China’s growth and stock market and the wider Asian reopening story, which is crucial for Asian equities. Portfolio diversification is key to hedge against inflation and effects of the Russia-Ukraine conflict on the global economy and beyond.

Our economic forecasts have been adjusted in light of the uncertainty over Russia and Ukraine and we expect elevated prices to continue and put more pressure on inflation. Europe will face more of a negative impact than the US or Asia due to its geographic proximity and high reliance on Russia for energy supply.

In a base-case scenario that there is no major recession in Europe, no spread of conflict, and that Europe's oil and gas supplies will not be adversely affected in the long term, our GDP forecast for Europe has been lowered from 4.4% to 2.8% for 2022, whereas there is still good growth going forward for the US, and the forecast is only slightly down now from 3.9% to 3.4% for 2022. For China, while slightly above trend but still lower than expected, the forecast has been adjusted from 5% to 4.5% for 2022. The forecast for Japan is for a 2.5% growth for 2022.

There is potential for inflation to rise with higher geopolitical risks, and our 2022 inflation forecast for Europe has been revised from 4.3% to 8.0%, and to 4.7% for the US, assuming current sanctions on Russia oil and gas continue. Looking at how the Russia-Ukraine conflict has changed the Fed's outlook, our view is that there will be five more rate hikes between now and the first quarter of 2023.

We are anticipating a positive reopening story in China, and a potential turning point over the next few months with the introduction of the Chinese mRNA. China's equity market has seen an incredibly volatile month in March, but earnings in China should improve. If the current Covid-19 situation in China and the Ukraine conflict can be eased, some of the inflationary pressures can also be relieved, and China on a relative basis will look very attractive.

China is investable, but investors need to be very selective, and keep in mind the ebbs and flows of the geopolitical situation. There are three further points that will continue to drive growth in China equities: the pickup of the domestic economy and the opening of trade; discount on ADRs; and the risk premium on China. The Hong Kong market also presents opportunities as the valuation of many stocks is currently low, and reopening is expected to take place.

While China will be the biggest story, we expect ASEAN countries to see growth as well, as overall company earnings have been better in Asia, which is why these markets have outperformed. Singapore has done well in its reopening, and we overweight the country, particularly its financial sector, as rising rates will benefit the private banks. Thailand and Indonesia will also benefit from reopening with increased hope in the return of tourism, as well as from rising commodity prices.

We overweight Japan in our Asian portfolio, particularly with China picking up, as many Japanese company earnings are linked to China. We are also positive on Japan's financials, which are keenly geared to rising rates in the US. At present, there are still company earnings being hurt by import costs, particularly oil, so it remains important to be selective.

On the other hand, forecasts for Taiwan are pointing to it being expensive. Taiwan has done incredibly well as a market, particularly in the mid-caps, especially those that have been supplying goods to the US and Europe, however a shift in demand towards services and away from goods may become evident when reopening takes place.

Within fixed income, we are still positive on credit and high yield, particularly in the oil and commodity space. We prefer Asian credit as an asset class, since Asia has better spreads, and a more robust story.

We have always had a strong structural view on Asian credit and think it is more diversified relative to developed market fixed income. The selloff in Beijing and widening credit spreads due to the property issues in China, the pandemic and regulatory issues, have led to opportunities with good fundamentals and cheaper assets. Having said that, we are finding better credits around the region, preferring Japan, India and Indonesia. On the consumer side and on some commodities, there are some very good opportunities, but again, there is a need to be selective.

At this stage of the cycle, diversification is key. We still like equities over fixed income, but we think investors should use real assets to hedge the volatile market. What we are recommending from a multi-asset view is diversification. The 60-40 model has been challenged. Instead of having 60% bonds, take into consideration commodities and real assets.

In the short term, volatility will continue, but we should see stabilization over the summer, which will present revived buying opportunities.

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Sean Taylor

Chief Investment Officer APAC and Head of Emerging Market Equities at DWS