Eastspring Investments: Asian economies with large domestic populations could fare quite well amid market headwinds

June 15, 2022

Eastspring has published its 2022 Mid-Year Outlook - Inflation. Recession. Geopolitics. Do investors need a different playbook? – in which it assesses the trends likely to drive markets over the remainder of the year and the asset allocation implications these might have for investors.

The firm expects a number of existing risks including the Russia-Ukraine conflict, hawkish central bank policy, rising yields, supply shocks and China’s zero COVID policy will continue to exercise influence in the second half of the year, though it may be too early to suggest developed market economies are in recession. Economies like the US are more likely still transitioning to a ‘late business cycle’.

The outlook for emerging markets is, however, more mixed with some Asian economies reliant on China’s growth trajectory and other emerging markets facing imported inflation as a result of a stronger US dollar and supply disruptions.

The Eastspring Mid-Year Outlook identifies the following key trends for the coming months:

• The likely shift of consumption from goods to services is likely to benefit Asian economies with large domestic populations. Reopening post-COVID should benefit tourism-based economies such as Thailand, while commodities based-economies such as Malaysia and Indonesia should also fare well.

• Despite current bearish sentiment, China’s economy has likely bottomed in the second quarter and greater fiscal support and accommodative monetary policy will likely improve prospects going forward.

• Improved valuations of both equities and bonds, combined with the potential peak in inflation this year, could allow traditional 60/40 portfolios to resume their strong performance over the coming decades.

• Inflation and interest rate expectation, combined with the massive infrastructure and capital expenditure needed to meet decarbonisation targets, should benefit value stocks and select sectors.

• Exposure to low volatility and/or income strategies can help investors weather more frequent equity market swings. Asian equities offer an attractive solution, with dividend income being a long-term driver of Asia’s equity returns (approximately 25% of total annual returns over the last 20 years).
• The need for massive funding to combat the significant climate challenges facing Asia should lead to increased sustainable and green bond issuance, presenting new opportunities for investors.

Commenting on the 2022 Mid-Year Outlook, Bill Maldonado, Chief Investment Officer at Eastspring Investments, said:

“Market conditions today are clearly challenging and it is reasonable to expect the headwinds we have seen in the first half of the year continue in the second half of 2022. The fact that there are so many changing factors to consider means that a wide range of outcomes is possible, with broad diversification and liquidity key considerations in a slowing growth and rising inflationary environment. Investors will have to be particularly nimble in managing their asset allocations in the coming months given the risks posed by geopolitical tensions, supply chain disruptions and the potential for policy missteps as central banks and governments seek to combat inflation and manage continuing responses to COVID.”