Asia outlook: Three questions for 2H

A monthly guide to investing in Asia Pacific financial markets

Heading into the second half of the year, we see three key questions that can guide investors: Should we be worried about inflation? Is China’s recovery in jeopardy? And are dividends at risk as capex increases?

The economic bounce back has been stronger than expected, as have inflation prints. As a result, recent Federal Reserve comments suggest that tapering and rate hikes could come sooner.

The good news is the swift rise in consumer prices is widely expected to fade by the end of the year, and we expect the US consumer price index to be contained this year. Also, Fed tapering is likely to be put off until next year and Asia’s central banks are likely to stand pat for now.

China’s economy, meanwhile, is slowing after its rapacious start to the year. Pentup demand is fading, exports are losing some steam, raw material prices remain elevated, and policy normalization is slowing credit growth. The uneven state of the recovery, in our view, calls for a dovish policy turn and more support for SMEs.

So, despite the headwinds, we expect credit growth to stabilize and policy to ease somewhat. China’s GDP growth will likely fall sharply from the low-teen rate in the first half, but it should remain robust at 5–6% y/y in the second half.

This backdrop means that corporate earnings in Asia ex-Japan are set to swell (we expect 30% growth). Companies are therefore likely to ramp up their spending, but we anticipate a moderate rise only. Dividend payouts in Asia should therefore rise this year after sliding last year, helping the region’s average yield return to a healthy level of 2.1%

Our overall guidance is still to seek out reflation and reopening winners via our preferred sectors and to consider themes in sustainability like Asia’s new mobility sector, China’s and Japan’s greentech industries, and stocks linked to the “Future of Earth.” Market-wise, we are taking profit on Singapore after its solid run this year and to rebalance our portfolios across value and growth. We like China for its catch-up potential, India amid improving macro indicators, and Malaysia as a hedge to our overall pro-risk stance.

Likewise in credit, differentiation is key given the idiosyncratic risks facing both the Asia IG and HY segments. And while we expect Asian currencies to appreciate in the near term, they are set to pull back against the US dollar once the Fed announces the removal of accommodation.

The second half will likely be more volatile than the first. But investors should remain invested, diversified, and positioned for upside.

Written with Mark Haefele, our Chief Investment Officer.

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