Squaring the circle
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Squaring the circle

A monthly guide to investing in Asia Pacific financial markets

More pieces are falling into place for Asia to outperform other regions in 2H. Recent data confirms our view that the US is late in its economic cycle, while China is only at the start.

Our central case assumes that tighter bank lending and lagged impacts from the Federal Reserve’s rate hikes will spur a mild US recession starting in 2H and slowing growth in Europe. But in Asia, China’s rebound and regional policy pivots should help counterbalance the macro slowdown underway in the West. In fact, we estimate growth in Asia will outpace developed markets by nearly 5 percentage points and now see China expanding by at least 5.7% this year after beating expectations in 1Q.

Equity markets, however, are pricing a different story. The S&P 500 is trading at a valuation multiple historically associated with mid-teen earnings growth, consistent with a near-perfect landing in the US economy. Meanwhile, most Asian markets still trade below their 10-year P/B averages.

In our view, this disconnect offers compelling opportunities for investors to benefit from Asia’s relative strength. We forecast high-single-digit upside for Asian equities by the end of the year, compared to an expected pullback of seven percentage points for the US and two percentage points for Europe.


Uncertainty means selective positioning is required

We continue to prefer emerging market equities and China in particular. China’s revival should support around 14% earnings growth this year and returns in the high teens from here. Geopolitical risks haven’t faded, but unless tensions meaningfully step up, attention should return to improving fundamentals in the quarter ahead. Within China, the consumer, internet, transportation, capital goods, and materials sectors remain our preferred recovery beneficiaries.

Korea, meanwhile, remains well-positioned to benefit from an improving semiconductor supply-demand picture in the second half.

We stay most preferred on both the market and its chip sector and see further room to run, even after the strong rally. Elsewhere, we favor select tourism-related names in the region and Thai equities.

By contrast, we have a least preferred view on US equities. With slowing consumption and an elevated cost of equity, we think investors should avoid unprofitable long-duration growth stocks and pivot toward tech stalwarts with distinctive self-help strategies.


Position for dollar weakness and buy quality bonds

Fading US growth also supports our weaker US dollar view. The AUD and JPY are most preferred in our global strategy, given the expected recovery in China and our expectation that the BoJ ends its yield curve control policy in 2H. Regionally, we favor high-yielding currencies such as the IDR and INR, and China reopening beneficiaries such as the CNY and THB.

We also think high-quality investment grade credit is attractive, with compelling yields and the potential for capital gains in case of a slowdown in economic growth. We also see gold as an appealing portfolio hedge, supported by strong central bank demand and USD weakness.

As tempting as it is to dismiss the recent turmoil as idiosyncratic, we see it as an important reminder of the late-cycle economic risks that come with an unprecedented global rate hiking cycle. Even though US and European markets have ostensibly taken recent events in their stride, we see a compelling opportunity for investors to rotate into safer pockets of relative strength in Asia.

As always, we hope this edition provides you with valuable insights and ideas for your investments and wish you the best in the month ahead.


Written with?Mark Haefele , our Chief Investment Officer.

Download the full report ?to get our views on where we think markets might head and how investors can navigate them.


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CHESTER SWANSON SR.

Next Trend Realty LLC./wwwHar.com/Chester-Swanson/agent_cbswan

1 年

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