Unlike most parts of the world that are going through economic slowdown this year in a mid-cycle economy, Southeast Asia is on the cusp of the new dawn and is expected to experience a growth spurt, says James Cheo, Southeast Asia chief investment officer (CIO) at HSBC Private Banking and Wealth Management.
He notes that Southeast Asia had a bumpy ride last year, growing at a mere 3.6%. With the economic reopening underway, the region could grow by 5.2%, translating into earnings growth of 12.3% for Southeast Asian companies.
“The structural story for Southeast Asia remains very strong,” Cheo said at the HSBC Global Private Banking and Wealth 2022 Investment Outlook. “If the region can maintain around 5% growth over the next decade, Southeast Asia is going to be the fourth largest economic bloc behind the US, China and the Eurozone. Therefore, I think investors cannot afford to ignore Southeast Asia in 2022.”
One of the game changers for the region is the Regional Comprehensive Economic Partnership (RCEP), the world’s largest free trade agreement. The RCEP will bring deeper trade and investment integration for the region, predicts Cheo.
The RCEP is expected to invigorate new rounds of investments and infrastructure spending for the region, following the subdued and investment landscape over the past two years. For example, Indonesia will attract more investments for its nickel deposits, which will be essential for the batteries needed for electric vehicles, Cheo explains.
“With reopening, consumption in Southeast Asia is also expected to recover very strongly this year. Of course, tourism is really the wild card — it could go either way, but I think it’s going to be very bumpy. While it is not likely that we’re going to reach pre-pandemic levels this year, I think even a recovery or move towards the right direction with living with Covid-19 would be very positive for the tourism sector as a whole,” adds Cheo.
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Individual markets growth outlook
Coming off the low base of 2020, when the economy contracted by 5.4%, Singapore’s economy grew by 7.2% in 2021, one of Asia’s outperformers last year. This year, Singapore’s growth is likely to moderate due to the slower global manufacturing cycle, says Cheo.
“The good news is that the Singapore service sector still accounts for 10% of its GDP, and could actually get some modest boost, especially if the vaccinated travel lanes work out this year. Thanks to the strong vaccination progress and the judicious management of how the pandemic has gone over the last few years, we think that Singapore’s economy can easily grow by around 3.8% for 2022,” he adds.
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Inflation is slightly picking up due to the higher energy prices, says Cheo. Core inflation is likely to hit 1.6% in 2022. As such, HSBC believes that the rosy growth outlook coupled with price expectations will warrant another round of tightening by the Monetary Authority of Singapore in April and October this year. “Therefore, we are bullish on the Singapore dollar — we think it could outperform the US dollar this year,” says Cheo.
HSBC is also bullish on the Singapore equity market, especially for its focus on large cap, quality and dividends. This outlook is underpinned by expectations of a positive momentum for the three Singapore banks. These index heavyweights stand to gain from rising rates which will translate into better margins for them. The 30 component stocks of the Straits Times Index are seen by consensus to grow earnings by 14.5% this year. HSBC expects the index to hit 3,440 points by the end of the year.
Indonesia is also an interesting market that is expected to be a top performer this year, says Cheo. The market’s consumption is forecast to be extremely strong due to the economic reopening, the aforementioned nickel deposits investments as well as infrastructure spending.
HSBC expects Indonesia to grow by 5.1% this year with inflationary pressures of 3.1% for 2022. “It is very likely that Bank Indonesia would consider tightening monetary policy in the second half of the year especially with regards to the reserve requirement ratio (RRR) and the seven-day (reverse) repo rate, probably by 50 basis points. By and large, I think Indonesia is in a fairly strong position for 2022,” says Cheo.
Indonesia has seen early indications of turning consumer and business sentiments, similar to Malaysia, adds Cheo. He says Malaysia’s growth should be fairly robust at around 5.6% and lower inflationary pressures at 2.1%. HSBC believes Bank Negara Malaysia would be very gradual in tightening, expecting around 50 basis points increase for 2022.
The Philippines is another market that is likely to sustain the economic momentum, as indicated by data such as motor vehicle sales and industrial production. HSBC expects the Philippines to grow by 6.2% in 2022, although inflation at 3.7% may lead to price pressures. In terms of monetary policy, Cheo says it is likely that its central bank would be in a wait-and-see mode to maintain growth.
High conviction themes
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Aside from Asian consumer revival, HSBC has also identified China’s green revolution, Asian credit opportunities as well as next-generation Asia tech leaders as part of its high conviction themes in 2022. Fan Cheuk Wan, CIO for Asia, global private banking and wealth at HSBC, says Asia is the world’s largest carbon emitting region, contributing 52% of total carbon emissions, which means that the region has a big role to play in the net zero transition.
“We see attractive investment opportunities in green technology, renewable energy and the electric vehicle supply chain. We also anticipate significant electrification across the manufacturing sector in Asia, with China committing to achieve carbon neutrality by 2060 while India has pledged to achieve net zero by 2050,” says Fan.
The International Energy Agency estimates that China will need to invest an average of RMB5 trillion ($1.6 trillion) every year until 2060 in clean energy and industrial upgrading to achieve carbon neutrality.
“The adoption of new energy vehicles (NEV) will pick up in China, given policy support and change in consumer preference. We project NEV growth to reach 117%, 37%, and 28% in 2021, 2022, and 2023, respectively. With increasing renewable energy mix and its intermittent nature, China needs to invest in energy storage capacity, smart grids as well as hydrogen as clean energy fuel,” says Fan.
Meanwhile, Cheo highlights that Asian investment-grade credit, which accounts for 80% of the overall Asian credit market, has seen credit spreads remain elevated compared to pre-pandemic levels and remains attractive versus their developed market peers.
“The Asian high-grade sector has remained resilient. We continue to see credit opportunities in Asia as the region offers an important source of yield pickup over developed market bonds. We increase our focus on quality issuers in Asian investment-grade credit and Chinese state-owned enterprises. We also search for carry opportunities in Indonesian hard currency bonds, better quality Chinese green-tier developers and selected Indian hard currency corporate credit,” says Cheo.
The last high conviction theme is next-generation Asia tech leaders. Fan says there is evidence across Asia as well as the world that companies are participating in “the big reset”, as capital expenditure picks up and companies put some of their bumper cash positions to work. HSBC’s theme focuses on the industry leaders which are commanding significant market share in the technology hardware space.
“Asia is already the global technology innovation hub, with key tech-focused economies including Japan, Taiwan, South Korea and Singapore. We are the recognised global leaders in terms of development of semiconductor technology, artificial intelligence, big data, FinTech, automations and robotics.
“We believe the Asian technology companies will benefit from the ongoing metaverse disruption mainly in three areas — delivery, infrastructure and digital content. Asian supply chains in displays, Fresnel lenses, waveguide optics and cameras should benefit from the metaverse innovation,” says Fan.
Photo: HSBC
