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Asia Quarterly Outlook - Q3 2021

Paras Anand

Paras Anand - Chief Investment Officer, Asia Pacific

Balance is key as the economic recovery sees a broadening of regional returns. It is gathering pace across Asia thanks to vigorous corporate earnings growth. How can investors position themselves to capture emerging opportunities while managing the risks of renewed volatility and rising inflation?

 

Key points

  • Fresh waves of Covid are affecting certain markets across Asia. Still, investors are choosing to look through these pandemic-related issues to focus instead on the region's longer-term growth prospects.
  • India has taken the hardest hit, but an accelerating digital economy and robust IPO pipeline give investors reasons for optimism.
  • Asia is better placed than other regions to manage rising inflation.
  • Corporate earnings expectations suggest a strong recovery across Asia, with technology and consumer-related sectors, in particular, offering high levels of earnings growth.
  • Striking a balance between structural growth drivers and downside protection against volatility will be a key theme for the third quarter of 2021.

Market overview

What impact will the resurgence of Covid have on the region's markets?

When we appraise pandemic-related issues in Asia, we see some challenging situations, especially in economies like India and markets with more localised outbreaks, such as Taiwan, Japan, and Singapore. However, we find that investors are looking through what they perceive to be relatively short-term events to focus instead on longer-term growth prospects and attractive structural drivers for economies and companies.

What are the implications for Asian emerging markets, such as India?

Against a backdrop of well-publicised public health challenges, emerging market investors continue to concentrate on the positive longer-term growth narrative. Looking more closely at India, the country's per capita consumption remains behind that of other economies across the region. That said, the critical thing to note is that India's consumption levels are trending higher. What's more, India's accelerating digital economy is very much at the forefront of investors' minds, as is the tranche of upcoming IPOs – an excellent example of how the country's corporate sector is rapidly evolving.

Regional outlook for the quarter ahead

Concerns are mounting over rising inflation. How will this impact Asian assets?

Compared to other parts of the world, Asia is in a solid position to manage a higher level of inflation. In particular, the region has already been living with higher relative inflation in commodities, goods, and labour costs for the past ten years. In parts of the world that are unused to rising prices, we could see subsequent bouts of heightened volatility. In Asia, however, the effects should not be as pronounced. Therefore, we would characterise the current environment as one of elevated growth that is partially clouded by higher inflation.

What is the outlook for the region in the quarter ahead?

From our on-the-ground analysis and research in Asia, we are witnessing a generally favourable business environment. Certain key areas, such as technology, semiconductors and those related to consumer activity, continue to offer a high level of earnings growth. Interestingly, Japan, for example, boasts corporate earnings that are far higher than expected.

Aggregate earnings growth estimates by region, 2019-2021 CAGR

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Source: Fidelity International, April 2021. CAGR is compound annual growth rate.

Key areas of focus for investors

What are the crucial areas of focus in the coming quarter?

1. Balanced exposure. It's vital to balance exposure to positive long-term structural drivers and downside protection, especially when a higher inflationary environment could create some volatility. If we look at this in aggregate: we have a background of healthier global demand and rising inflation that favours a broadening out of returns across the region.

2. Laggards are building up steam. We are positive on areas that have trailed over the past 12-18 months. These include Southeast Asia and India that both offer strong long-term prospects. We also like Australia and Japan, given their appealing combination of risk and reward. In Japan, for example, we believe the corporate sector will be a beneficiary of improving global growth, plus balance sheet liquidity offers resilience.

3. Sectoral spread. Investors would also be well-served in the coming quarter by having a more balanced exposure to various industry sectors. Higher-growth industries, such as technology, could, for example, be offset by positions in the industrial, consumer, and financial space.

Important Information

This information is for Investment Professionals only and should not be relied upon by private investors. This information must not be reproduced or circulated without prior permission. Investors should note that the views expressed may no longer be current and may have already been acted upon.

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Unless otherwise stated, dated as of June 2021.

MK12685; 21CH0634; SSL 21NL0614

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Paras Anand

Paras Anand

Chief Investment Officer, Asia Pacific