Asian Equities: A Constructive Outlook, but Risks Remain

With the emergence of the Omicron variant, COVID once again became the common factor impacting economies across Asia in the fourth quarter. Domestic mobility in China was hindered due to sporadic outbreaks, and ASEAN’s reopening was temporarily suspended. However, many developed markets continue to push ahead with reopening their economies despite the record high number of cases. The share of severe cases in developed markets seem to be lower than the previous Delta wave, owing to high vaccination rates and reduced potency. In our view, the race between hospitalization rates and Omicron peaking would likely take place in the first quarter of this year—and this could act as a key reference for reopening decisions in Asia.

Supportive Backdrop, but Risks Remain

Looking ahead, major central bank policies are expected to diverge in 2022, with the U.S. Federal Reserve (Fed) turning hawkish with tapering and rate hikes on the horizon, while China’s monetary and fiscal policies are expected to be supportive ahead of the CCP’s 20th National Congress. The People’s Bank of China cut its RRR (Reserve Requirement Ratio) by 50 basis points (bps) in December 2021, releasing RMB1.2 trillion to cushion the underlying economy. At the same time, supported by a strong U.S. dollar outlook this year, a global economic recovery would mean higher demand for manufactured goods from Asia—which would bolster corporate earnings. However, inefficiencies within manufacturing processes would still require time to resolve, and supply chain disruptions in parts and shipping may continue to push costs higher in the coming months.

A Positive Outlook for Asian Equities

We are constructive on Asian equities and expect returns this year to be driven by decent corporate earnings growth, albeit slower than levels seen in 2021—especially after a de-rating in valuations last year. The outlook for the Chinese equities market has also improved on expectations of fiscal and monetary easing this year—and as current valuations have been significantly discounted on the aggressive regulatory crackdown across the country and the subsequent massive underperformance of the market last year. Looking across to the ASEAN market, given the improving vaccination rates across the region and reduced potency of Omicron, an interruption to ASEAN’s path to recovery could likely be short. In our view, economic growth in ASEAN will likely outpace other global regions in 2022. At the same time, external balances for South Asian economies are much healthier than before and therefore less vulnerable to currency volatility from a more aggressive Fed.  And over the longer term, the global move toward carbon neutrality within the next 50 years means there will be significant growth in demand for commodities like copper and nickel—resources which ASEAN countries are endowed with.

COVID has indeed accelerated the global trend of digital transformation. We believe this will be beneficial to Asian economies over the long term as Asian companies are core suppliers of hardware technology. Asia boasts some of the world’s advanced manufacturing technologies in semiconductors, and has a dominant position in computer memory, which is necessary hardware for 5G and the Metaverse. Specifically, in Southeast Asia, the stars are aligned with fast growing income levels and a high smartphone penetration rate, but low adoption rates in on-demand services, digital financial services, and e-commerce, which could significantly reshape ASEAN markets with unicorn¹ IPOs in the next five years.

Key Opportunities

Against the supportive backdrop, we continue to see opportunities in Asian corporates that have exposure to secular growth themes such as technological ubiquity (digitalization and connectivity of everything), evolving lifestyle and societal values (sustainability, millennial/Gen Z consumption trends, healthy living) and de-globalization (supply chain diversification/bifurcation and reshoring). We believe the recent share price corrections in some companies have made valuations more attractive, creating opportunities to build positions in strong companies at attractive prices.

At Barings, while stylistic rotations have caused some volatility across markets, our approach remains anchored in our Growth-at-a-Reasonable-Price (GARP) investment philosophy. At the stock selection level, this approach helps us to avoid overpaying for a company’s growth, while at the portfolio construction level, it helps limit exposure to unintended styles or risks. 

Unicorn is a term used to describe a privately held startup company with a value of over US$1 billion.