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Asia Quarterly Outlook - Q4 2021

Paras Anand

Paras Anand - Chief Investment Officer, Asia Pacific

The US Federal Reserve’s much-anticipated tapering of its asset purchase programme coupled with a slowdown in China has unsettled markets. How can investors position themselves to benefit from these trends while levering the opportunities presented by the growth in sustainability-focused investing?


Key points

  • Regulatory concerns and an economic slowdown have knocked investors’ confidence in China. However, these events present us with a range of attractive investment opportunities.
  • Concerns about reduced central bank support in the US may be overdone. On closer inspection, this is an opportunity for Asia’s businesses to benefit from rising demand amid a strengthening global economy.
  • We see scope for China’s economy to recover as we move through the final quarter of the year and into 2022.

Market overview

What is our view on recent policy decisions in China and their impact on its financial markets?

Over the past few months, we've witnessed an intense period of regulatory tightening in China. These moves have exacted a good deal of pressure on different parts of the corporate sector, most notably internet companies. What’s more, the swiftness of the clampdown has led to a period of market volatility and broadly negative sentiment towards the country. However, in our view, it also means that many sectors in China now look oversold, particularly from a longer-term perspective.

With US tapering on the horizon, what could the implications be for Asia’s equity and credit markets?

We don’t think that a tapering of the US Federal Reserve’s (the Fed) monthly asset purchase programme will significantly impact Asia’s asset markets. There are two reasons for this. First, a reduction in Fed support should be viewed positively because it highlights more robust underlying demand and a higher level of economic activity. This is usually supportive for Asian companies. Second, and perhaps more importantly, the US is now placing greater emphasis on fiscal policy. An example here is the multi-billion-dollar boost to infrastructure spending, which hasn’t even started yet. When combined, these factors suggest a positive outlook for Asia’s capital markets.

What are the latest sustainability developments, and are there any emerging opportunities for Asia’s companies?

Climate change is becoming a central part of economic strategy and government policy across the region. For the corporate sector, this drive is accelerating the integration of sustainability into company strategies. More broadly, it should lead to an extended demand cycle in areas such as semiconductors and the electric vehicle value chain, with emerging themes including battery technology and the expanding role of renewable energy. However, climate and environmental factors will also guide the trajectory of Asia’s financial markets, with developments around the funding of greener economies. This could take the form of higher green bond issuance or an expansion in impact investing.

Regional outlook for the quarter ahead

In terms of your outlook for the region, where do you see value?

Looking back at the first quarter of 2021, we argued that there was significant scope for parts of the region, such as Southeast Asia and India, to catch up with a North Asia recovery led by China, Taiwan, and Korea. Subsequently, we have seen strength in Southeast Asia and India, but this was accompanied by weakness in China.

So, as we move into Q4 and turn our attention to 2022, we see scope for a recovery in Chinese markets and perhaps some consolidation in markets that have been exceptionally strong in recent months, for example, India. Elsewhere, we remain constructive on Japan and Australia, as these markets offer an attractive combination of total shareholder returns and supportive valuations.

Valuations coming to the fore in China: Price-to-earnings (P/E) ratios of regional equity markets


Source: Refinitiv, MSCI indices, August 2021. Note: P/E ratio based on 12-month trailing earnings.

Key areas of focus for investors

What are the areas of focus in the coming quarter?

  1. Scope for recovery in China. An increase in the regulatory oversight of certain industry sectors has introduced an element of volatility across the broader equity market. As a result of indiscriminate selling, we now see a wide selection of attractively valued stocks.
  2. Tapering fears could be overdone. As the Fed prepares to scale back the scope of its bond-buying programme, it’s worth remembering that this is a positive development that reflects a stronger economy with more robust demand. Ultimately, we feel that Asian companies will prosper in this new-normal climate.

  3. Sustainability becomes more deeply ingrained. We expect to see further thematic developments relating to the deeper integration of environmental, social, and governance themes into corporate strategies. Furthermore, the market will play a more significant role in the financing of sustainability-related initiatives.

  4. Valuations and shareholder returns. We are positive on areas that have trailed over the past nine months, such as China, which now looks oversold. We also like Australia and Japan, given their appealing combination of attractive valuations and shareholder returns.



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