For global markets, the outlook going into the second quarter of 2022 is dominated by key developments including the Russia-Ukraine war, central banks’ hawkish policy turn, and the potential for China to counterbalance volatility elsewhere. In our Q2 global investment outlook, we have likened the current shifts to a reconfiguration of the ‘grand chessboard’ that has defined the geopolitical and geo-economic global order in recent decades.
Against this backdrop, as we turn specifically to the outlook for Asian markets in the second quarter, we see pockets of uncertainty as well as opportunity. Specifically, we see three themes that stand out: China’s direction, inflation dynamics, and the search for income.
China
Despite near-term uncertainties clouding China’s macro picture, we're starting to see policy support and stimulus coming through into the economy, which has the potential to make for a better environment as we turn the corner into the latter part of the year. For global investors, given the uncertainties over the war in Ukraine and more hawkish monetary policy from the US Federal Reserve and European Central Bank, China could serve as a useful diversifier. The country is further removed geographically and economically from the conflict in Europe, it benefits from capacity for further monetary and fiscal easing (not tightening), and it offers more attractive starting valuations.
At the same time, uncertainty remains high. Policies to contain Covid-19 remain the biggest question marks over China’s macro economy, with outbreaks and the effects of large-scale lockdowns like we’ve seen in Shenzhen and Shanghai expected to drag on output and make China’s target of achieving growth of around 5.5% this year a challenging one. More broadly, policy remains focused on deleveraging, property sector reform, and sustainable growth. In this regard, China’s outlook now looks less straightforward than it did in 2008 during the Global Financial Crisis. We don’t expect China to repeat its previous role as the “fiscal put” that dislodges the global economy from its stagflationary trajectory.
Inflation
Persistently high and broadening inflation remains one of the stiffest economic headwinds confronting the US, Europe, and several other major economies. But so far, for most of Asia, the picture has been rather different. China continues to deal with high industrial inflation, but this is being driven mainly by the same broad forces that are pushing up the global costs of energy and internationally traded commodities. More significantly, China’s consumer price inflation has ticked up only moderately in recent months. This relatively benign inflation has left China’s policymakers with more room to act to support the broader economy.
In some countries in the region, a little bit of inflation is a good thing. Japan, which had undergone a multiyear period where deflation was weighing down growth, is now seeing modest consumer price inflation feed into wage gains that are in turn increasing the purchasing power of consumers.
Income
Globally, against a backdrop of looming stagflation and a cycle of rising interest rates, the question of how best to invest for income requires a carefully considered response. In Asia, looking across the different asset classes in the region, whether fixed income, equities, or parts of private markets that can generate heightened levels of income attractive to global investors, we see opportunities. Within equities, we believe elective value can still be found in Asia in defensive sector names that have tended to prove resilient in previous bouts of inflationary pressure. In fixed income, China government bonds appear more attractive than other sovereign bonds on a relative basis given generally higher yields and diversification benefits. We remain broadly cautious on China’s property sector pending firmer confirmation of a recovery there, however; while valuations are not quite as compelling in the rest of the Asia high yield space, we do see selective opportunities emerging.
