Investing in Asia Pacific: Asia outlook 2022

A monthly guide to investing in Asia Pacific financial markets

After leading the world’s recovery from the pandemic in 2020, Asia has trailed in 2021. Asia is down 1% and China has slumped 12% this year, while the US (MSCI USA +26%) and the world (MSCI AC World +19%) have had a solid year. So, after a volatile 2021, what does 2022 have in store for investors?

Looking ahead, we are upbeat on Asia’s prospects. The headwinds that are weighing down financial markets—such as supply bottlenecks, rising energy prices, and China’s regulatory uncertainty—should ease in 2022, and rapid vaccination progress should allow economies to reopen more fully in 2022.

Overall, for 2022, we see slower but still solid GDP growth of 5.8% for Asia (vs. 7.0% in 2021) and 5.4% for China (vs. 7.6% in 2021). Given this backdrop, we are entering the year positive on the region’s risk assets and see opportunities in catch-up plays, reopening beneficiaries, and the winners of structural trends.

We’re entering the third year of the pandemic. Vaccinations are rolling, economies are gradually opening up, and travel is finally restarting. We’re optimistic about the year ahead, and we wish you all a prosperous and healthy 2022.

Outlook 2022

Asia macro: Where is Asia’s recovery heading?

? Asia’s recovery is confronting various challenges, but while the expansion is likely to slow in 2022, we expect another year of above-trend growth.

? With reopening momentum gaining pace, the backdrop is supportive for risk assets. Inflation is a risk, but we only see mild tightening in the year ahead.

Where are the opportunities in Asia?

? Strong earnings should power mid-teen upside for Asia ex-Japan equities and high-single digit returns for Asia high yield bonds.

? We are therefore upbeat on the year ahead, with a preference for sectors and markets with reopening potential, quality cyclicals, and winners of secular trends.

Are Chinese equities worth revisiting in 2022?

? It’s been a rough year for Chinese equities, but we think the worst may be over and see mid-teen upside for MSCI China.

? With headwinds starting to abate, opportunities are emerging in China’s new economy sectors for investors with a long-term mindset.

Is the worst over for Asia credit?

? Although China property fundamentals remain weak, we think policy fine-tuning will eventually shore up sentiment for Asia HY.

? We recommend diversified exposure to Asia HY via an index. Among single bonds, we prefer BB over B issuers and bonds with very short duration.

What does Japan’s new leadership mean for investors?

? New PM Kishida‘s plans to revitalize the economy should support the equity market. With reopening underway, we keep Japan at most preferred globally.

? Within Japan, we like stocks exposed to the economy’s normalization and see potential for ESG strategies to grow.

Are geopolitics a risk for 2022?

? Geopolitics have taken a backseat to the pandemic, but they remain an important force and are evolving in the face of new challenges.

? With new and old tensions likely to flare up at some point, investors should prioritize diversification as a method of risk management.

Long-term trends

What does “common prosperity” mean for investors?

? “Common prosperity” is China’s new model for economic development. Its goals and the associated policy moves will have significant ramifications for many years to come.

? Investors should focus on sectors aligned with strategic priorities, such as greentech and critical tech fields like AI and 5G, and avoid those likely to face headwinds, including luxury and education.

Is Asia on track to meet its climate goals?

? Asia’s carbon goals are achievable, but they’ll require steadfast commitment and significant investment in various fields.

? Investors looking to play a part in the green transition can consider ESG leader strategies, sustainable bonds and multilateral bonds, and carbon trading.

Are commodities heading into a “greencycle”?

? We think 2022 will be a transition year for commodities and the start of a “greencycle” for metals linked to the sustainable movement.

? We prefer active over passive commodity strategies for 2022, advise investors to sell copper’s downside risks for yield, and see opportunities in cobalt and lithium via equity markets.

Where to (re)focus in Asia tech?

? Asia’s tech valuations have declined in 2021, but earnings are solid and fundamentals resilient.

? Within Asia tech, we prefer select names in the semiconductor industry and China’s internet platform leaders. Beyond 2022, investors can consider Asia’s healthtech industry and players in the “ABCs of tech” (artificial intelligence, big data, cybersecurity).

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