Just weeks ago, the surge in inflation looked set to fade, the worst of Europe’s energy crisis had been averted, and the US labour market had started to cool. That suggested central bankers could soon step back after delivering a furious set of rate hikes over the past year. Predictions of a deep global slowdown were also being revised away, spurred, in part, by China’s swift reopening.
But single data points can completely upend market narratives. Case in point: The punchy January US jobs report. That was followed by a surprise increase in retail sales and sticky CPI data, raising concerns that disinflation could prove more protracted than hoped.
On cue, money markets swiftly repriced the terminal Fed Funds rate to 5.2% from 4.9%. Investors now face a new reality in which the US economy could be stuck in transit, leaving the Fed hawkish for longer. Europe, meanwhile, is on a better track, though inflation and higher rates remain challenges.
In contrast, China’s strong start cannot be overstated. Domestic mobility has normalised and a consumption revival is well underway. As trade and travel benefits flow across Asia, the region should reach a turning point in growth as early as 2Q2023. This trajectory means Asia stands out in a desynchronised world — and offers investors compelling opportunities.
Appealing entry point
At the corporate level, we expect regional earnings to bottom in 2Q2023 before rebounding 12% y-o-y in 2H2023 — supporting low-teens upside for Asian equities through year-end.
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Earnings growth in China will be stronger at a brisk 14% y-o-y clip, driven by improving fundamentals and a conducive policy mix.
We therefore remain most preferred on Chinese equities and see upside in the mid-teens through yearend. Renewed US-China tensions have contributed to a recent pullback, but we don’t expect the flareup to be a long-lasting drag as attention turns back to growth. Current levels offer an appealing entry point, in our view.
Other North Asian markets also look attractive. We think the early cycle IT sector will outperform broader Asian equities by high single-digits over six to 12 months as a new chip cycle begins. This underpins our most preferred view on Korea and memory chipmakers, leading-edge foundries, and select fabless chip designers. On the flipside, we shift India to least preferred.
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Still bullish bonds
The uncertain global backdrop makes predictable income returns more valuable. Asia investment grade credit yields look attractive at 5.5% and we look to add duration via higher-rated A/AA names. Select subordinated bank debt also offer a yield pickup of between 60 bps and 100 bps over senior bonds while Singapore REITs should benefit from rising rents and stable dividends.
As macro conditions begin to improve, high yielding currencies like the IDR and INR (versus the USD and TWD) should become more attractive. China’s reopening will likely also benefit a basket of the AUD, CNY, and THB, as well as commodities, where we forecast high double-digit returns on an asset class level.
With the final month of the first quarter upon us, our high conviction messages in focus are: Anticipate the inflections and seek income opportunities. Positioning along these lines can help investors capture attractive upside potential in Asia while staying selectively defensive globally.
Tan Min Lan is head of the Asia Pacific investment office at UBS Global Wealth Management
