Disclaimer

by clicking a geography button, you agree to abide by terms and conditions listed herein.

Home Insights Where to find...

Where to find compelling investment opportunities in Asia in 2022?

Given the pandemic led economic downturns as well as rising global inflationary fears, there is every reason for investors to remain cautious. Yet, there are compelling investment opportunities opening up in Asia, for example in Asia’s sustainable fixed-income market, according to Sue Trinh, Head of Macro Strategy, Asia, at Manulife Investment Management.

AsiaFundManagers.com: With Omicron, we are entering the next stage of the pandemic. To what extent will the issue dominate Asian financial markets in 2022?

Sue Trinh: Omicron and other Covid-19 variants are one of the key macro factors that investors need to watch out for in 2022. Others include the US policy normalization and China’s growth outlook, all of which may represent potential headwinds for Asia. However, their impact is expected to be felt differently in North Asia compared to Southeast Asia (SEA).

Our constructive view towards the Southeast Asia region is further reinforced by the higher real yields in major economies, namely Indonesia and India, which are attracting capital flows. We see the scope for economic growth catching up in parts of SEA as Covid-19 concerns ease.

AsiaFundManagers.com: The global supply chain has been severely disrupted. How much growth will this cost the Asian economies this year? What is the likely timeframe for normalisation?

Sue Trinh: Cyclically, macro conditions are expected to be more favourable for the reopening or recovery in Taiwan, Japan, and some of the ASEAN markets this year. Structurally, the Asia region has a lot of work to do to recoup lost output due to the pandemic. The biggest concern remains weak consumer demand which will be exposed by the looming downturn in export growth.

On the other hand, Asia’s milder inflation expectation comes down to one simple factor – trade surpluses. Maximising export production remains the marginal growth driver through the pandemic. At the same time, re-opening and pent-up demand pressure has not been as strong, while household consumption level in Asia has rebounded slower compared to other regions.

The surge in spending on goods as the rest of the world opens up has put much more upward pressure on long-distance freight rates to other parts of the world.

Asian Market Insights

Exclusive news, analyses and opinion on Asian economies and financial markets

Asian Market Insights

Exklusive News, Analysen und Meinungen zu den asiatischen Finanzmärkten

For the Asia region as a whole, we expect to see policy normalization will be at a much slower pace and of lower magnitude relative to previous cycles and other emerging markets.

AsiaFundManagers.com: Monetary policy in developed markets seems to remain accommodative in 2022. What course are the central banks in Asia taking? 

Sue Trinh: We think Asia’s fixed income will be supported by accommodative monetary policy stances. We believe this asset class is in a better position to withstand the Fed’s taper risks relative to 2013, thanks to stronger external positions, lower reliance on external funding, and better-balanced positioning.

The upshot is that Asian policymakers can afford to be patient on monetary policy normalization. While inflation will likely pick up further, large output gaps will help keep underlying price pressures in check. In the event global supply bottlenecks worsen upside inflation pressures, Asia is likely to escape the worst of the global inflationary shock, particular versus other emerging markets.

AsiaFundManagers.com: China growth is flattening, the Evergrande case shows the dark side of strong growth. How vulnerable is the Chinese financial sector to an escalation of debt problems?

Sue Trinh: Given the weaker economic data experienced in the second half of 2021, we believe there is a strong case for some moderate loosening of China’s monetary and fiscal stance.

But we doubt any easing will be either sufficient or timely enough to arrest a further slowdown in the economy or defaults.

Higher credit intensity over the past years has fueled China’s explosive debt growth. Public and private debt continues to make record highs and the private sector debt service ratio is above 20%, double the pre-GFC rate (global financial crisis). This speaks to an obvious increase in resource misallocation.

It isn’t surprising then to see the incremental capital-output ratio (ICOR, and a measure of the inefficiency with which capital is used) hitting new highs. The issue for the banks-developers-local government’s nexus is – as we have seen with Evergrande and several other developers with superficially strong balance sheets – if and when the expense of malinvestment is acknowledged, i.e., written off.

Chinese authorities understand the advantages of injecting more credit in the economy at this stage in the cycle are outweighed by the disadvantages and there is little respite in bond maturities this year or next.

AsiaFundManagers.com: How should investor balance the risk of the Asian exposure in 2022? Which investment classes and strategies are suitable in the current situation?

Sue Trinh: In 2022, we see growth opportunities in emerging markets, particularly in Asia. We believe that for investors, the search for yield will be as important as ever in the coming years. Despite our belief that interest rates will gradually rise, they’re likely to stay near historical lows, making asset classes that provide additional yield or income more attractive.

While we look at the challenges Asian credit has faced throughout 2021, there’s every reason for investors to remain cautious, as the recent upheaval has taken out the froth in the Asian bond market. The J.P. Morgan Asia Credit Index, which is widely used as a proxy for the market, lost around 3% in 2021 (Bloomberg, as of 17 January 2022).

The way we see it, the repricing of risk brought about a valuation reset. This is particularly true in the high-yield space where asset prices have fallen to a level not seen in years, relative to their peers in Europe and the US

In our view, this has created a compelling opportunity in Asia’s sustainable fixed-income market, particularly in light of the increasingly urgent search for yield in an environment that, despite talks about monetary tightening, continues to be characterized by historically low-interest rates.

In 2021, supply and demand on the ESG front have proven that there has been a growing popularity of sustainability-linked bonds. In the Asia-Pacific region (excluding Japan), around one in five new bond issue deals was an ESG bond. In what we consider to be a positive development, we’re beginning to see growth of another kind – diversification in issuers in terms of breadth (sectors) and geography in both the credit and sovereign space. We expect the issuance of ESG bonds in Asia to continue to grow in 2022, as focus shifts from the declaration of intent to actual implementation post- COP26 summit.

Lastly, we believe that Asian high-yield bonds offer particularly attractive valuations, with spreads well above historical averages, providing significant opportunities this year. Overall, we see global liquidity to remain relatively accommodative from a historical perspective for Asian credits in 2022. We believe that some credits, especially in the high-yield segment, are excessively priced to the downside.

Indeed, price dislocations, particularly in the China real estate sector that were experienced in 2021, do not reflect the underlying fundamentals of higher-quality developers and we continue to emphasise the importance of credit selection.

AsiaFundManagers.com: Thank you very much for the interview.

 

Sue Trinh
Sue Trinh
Sue Trinh, Manulife Investment ManagementSue Trinh

Head of Macro Strategy, Asia
Manulife Investment Management

With 18 years of financial industry experience, Sue Trinh plays a crucial role in helping Manulife’s Asia and global multi-asset teams navigate through current economic conditions and risks, and make informed investment decisions that could contribute to stable, long-term investment returns.

More News

Australia invests $550 mn in rare earths to lead energy transition

0
In a strategic move to strengthen its position in the global energy transition supply chain, the Australian government has a ...

India’s stock market cap to hit $10 tn by 2030

0
In January, India became the fourth-biggest equity market globally. The combined value of shares listed on Indian exchanges ...

Japan’s booming chip stocks drive Nikkei rally

0
After hitting an all-time high for the first time in 34 years in February, Japan's Nikkei Stock Average hit the key mileston ...

Identifying growth opportunities of edtech in Vietnam

0
Edtech in Vietnam is likely to grow at a 13.5% CAGR during 2024-2032 led by government initiatives and technological growth. ...