Manulife Investment Management sees a mixed bag for Asean markets this year. On the one hand, the region faces a slew of macro headwinds, including rising US inflation and rate-hike expectations, geopolitical tensions, spikes in Covid-19 cases and appearance of new variants dogging markets in recent months.
At the same time, prospects for 2H2022 look better, as inventory rebuilds and the unwinding of supply chain disruptions are expected to fuel a more sustainable recovery than the pent-up rebound of 2021.
An improved growth picture and slower inflation are likely to bring global markets back to a so-called “goldilocks economy” —not too hot, nor too cold, which should be far better for market returns and general risk assets, according to Manulife.
“Once inflationary and growth pressures ease, we expect global central banks to make a dovish policy pivot, which should create conditions that will allow for an extension of the economic growth cycle,” says Sue Trinh, head of macro strategy, Asia, at Manulife Investment Management. “While we expect uncomfortably high levels of inflation in the first half of 2022, they are likely to be driven by global supply issues, which can’t be addressed with interest rate policy,” she adds.
“While we expect uncomfortably high levels of inflation in the first half of 2022, they are likely to be driven by global supply issues, which can’t be addressed with interest-rate policy,” she adds.
Southeast Asian markets as the key growth drivers
Nevertheless, Asian economies will have their share of challenges this year, with the emergence of the Omicron variant, and China and other central banks in this region tightening.
“Some of the macro factors that we would highlight for 2022 are the Covid-19 variant, the US taper and China’s growth pattern, all of which represent growth headwinds for Asia,” says Ronald Chan, chief investment officer of equities, Asia ex-Japan, at Manulife Investment Management.
However, their impact is expected to be felt differently in North Asia compared to Southeast Asia, according to Chan, who is positive on Southeast Asia and India, which is seen to grow by 6–7% this year. “In addition, our positive view towards the sub region is further reinforced by the higher real yields in major economies, namely Indonesia and India, which are attracting capital flows.” In contrast, he expects China’s GDP growth to slow to around 5% this year from 8% last year, which, to be put in context, is lower than that projected for southeast Asia, says Chan.
High-yield credits and sustainable bonds poised for growth
On a whole, Asian fixed income markets experienced a challenging 2021. While regional economies gradually recovered from the Covid-19 pandemic, regulatory changes and idiosyncratic risk in some markets contributed to a divergence in performance between investment-grade and high yield credits.
Nevertheless, from the perspective of Murray Collis, deputy chief investment officer, fixed income, Asia exJapan, Manulife Investment Management is bullish on Asian high-yield bonds this year, which offer particularly attractive valuations, with bond yield spreads well above historical averages. “Overall, we see global liquidity to remain relatively accommodative from a historical perspective for Asian credits in 2022,” he says.