Asian equities underperformed global stocks in 2021. The benchmark MSCI All Country Asia Index dropped 2.49% last year, versus a 18.54% rise by the MSCI All Country World Index. However, analysts keep an optimistic outlook for Asian equities in 2022.
As per James Thom, Senior Investment Director at asset manager Abrdn, Asia experienced an equity market rally in the first half of 2021. But a regulatory reset in China and the prospect of US tapering has led to a correction. “Still, corporate Asia is well placed to withstand a cycle of a stronger dollar overall,” Thom wrote in a recent market insight.
In terms of valuations, he considers Asian stocks as reasonable, relative to developed markets. “The 12-month forward price-earnings ratio for the MSCI AC Asia Pacific ex Japan Index stands at 15.6x, compared with 22.5x for the S&P500, 16.2x for MSCI Europe and 20.3x for MSCI World.* Consensus earnings growth for Asia Pacific ex Japan markets is forecast to be in double digits for 2022,” said Thom.
Looking at some investment themes, the investment expert from abrdn believes that Asia’s growing middle class will fuel increased demand for healthcare services and wealth management. “At the same time, changes brought about by the pandemic could prove durable and reinforce existing trends – such as increased adoption of cloud computing and 5G networks.”
Furthermore Thom sees Asia at the forefront of change to a lowercarbon future. According to him, investors can anticipate tailwinds for companies operating in renewable energy, batteries, electric vehicles, related infrastructure, and environmental management. Especially the outlook for China’s renewable energy sector seems bright, “given the structural trend of rising renewable energy needs and power grid upgrades.”
Asian equity markets investors should watch in 2022
The Nikko Asset Management’s Asian Equity team paints a diverse picture for Asian equities in 2022. In general, easing worries about the impact of the Omicron coronavirus variant supported market sentiment in December of last year.
“The one country where Omicron could have a greater impact than most is China, which has stuck to a zero-tolerance policy”, the Nikko AM team writes. However, the policy shift towards ‘stability’, recent interest rate cuts on one-year loans as well as the reserve requirement ratio depicts a continued path of support from authorities. Therefore, “China continues to offer opportunities, especially in the domestically oriented areas of healthcare, software and consumption.”
India is likely to face another Covid-19 wave, according to Nikko AM’s Asian Equity team and has turned cautious on the country, given “its market’s elevated valuations and pockets of exuberance, particularly in the small and mid-cap space”. However, they add, that India continues to offer some “fantastic long-term and sustainable return opportunities, especially as valuation levels become more bearable.”
For ASEAN, the pandemic has been a critical accelerator of the new economy as per the Nikko team: “Some countries are further along than others, with ingredients in place for better quality economic growth – such as Singapore, Indonesia, and the Philippines.”
For Indonesia, the experts from Nikko favour “several commodity-related stocks focused on the development of renewable energy and electric vehicles – two areas of sustainable demand.”
Uncertainties for Asian equities in 2022
Meanwhile, Fullerton Fund Management is negative on Asian and China equities, “due to weakness across China’s real estate sector, and the uncertainties created by China’s regulatory crackdown, coupled with Asia’s narrower growth advantage over developed markets”.
“More policy stimulus from China would be a key signpost for us to reconsider our negative outlook. However, investors still need to be selective as policy shifts have created a significant divergence in performance between China A-shares and China All-shares,” Fullerton’s Stretegist Robert St. Clair wrote in the latest quarterly report.
“China A-shares, the domestic market, with prices running above trend and China All-shares, the domestic and offshore markets, with its prices running below trend, as it has suffered a lot from the de-rating of IT firms given the regulatory crackdown.”
However, the Fullerton strategist believes that investors in Asia and China can still find valuable alpha opportunities across sectors that have robust structural trends. “They should be less impacted by policy changes and cyclical growth weakness, e.g. consumer products, communications, healthcare, and renewables,” St. Clair added.
* Bloomberg, 18 November 2021.