Finding better balance

A monthly guide to investing in Asia Pacific financial markets

Asia's bull run is being tested. Higher 10-year US Treasury yields recently sparked a sell-off in the region, with growth stocks and investment grade credit bearing the brunt of the fall. The fear is that the combination of easy monetary policy today, vigorous economic growth, and fiscal expansion will lead to sustained high levels of inflation and earlier hikes in policy rates.

Indeed, our economists forecast GDP growth rates of 8.5% for Asia and 6.6% for the US. But these jumps are coming after a pandemic-wrecked 2020. So even though the yield curve has steepened—and may continue to do so—we expect G10 central banks to hold the line on policy rates. With unusual supply-demand mismatches as well as base effects largely responsible for higher prices this year, we think inflation spikes should prove transitory as economic activity (and supply) normalizes.

Still, inflation fears will likely worry market participants, especially with oil prices on the rise. But as bond yields rise further, so long as the pace of the increase is gradual and broadly reflects stronger inflation expectations, real interest rates— which matter most for risk assets—should stay negative and remain supportive of regional markets.

We retain a favorable view of Asia ex-Japan stocks and stick with our preference for equities over bonds. But the current market environment does call for portfolio tweaks. We advise rebalancing portfolios to more value-oriented and cyclical markets and to companies that benefit from the reflation story. We like India and Singapore for their catch-up potential, and China as the leader in the overall recovery.

Asia’s consumer discretionary, financial and energy sectors are also good picks for the reopening and reflation trades. We also maintain our preference for high yield over investment grade, and in commodities, we like crude oil and copper.

Furthermore, the crunch in growth valuations could offer appealing entry points for long-term positioning, in our view. The sell-off hasn’t changed our earnings forecasts or structural narratives, so we remain bullish on emerging secular themes like 5G, the digital economy, and greentech.

Written with Mark Haefele, our Chief Investment Officer.

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