Asian Equities Remain Well-Supported

There are a number of key factors driving the Asian equities market today. For one, following the reopening initiatives of Western countries, several economies in Asia reopened their borders in the first quarter of this year—and a result, began to see a recovery in domestic activities and international travelers. On the other hand, Asia’s largest source of tourists, China, continues to emphasize a “zero tolerance” COVID policy, which is expected to disrupt the already fragile global supply chain. Eventually, however, the COVID overhang could gradually subside as mRNA vaccines and oral drugs become sufficiently rolled out in China, but this will likely take time to unfold. In the coming months, we expect the varying approaches to managing COVID will likely become a differentiating factor for economic growth across the region.

Second, major central bank policies are expected to diverge this year, with the U.S. Federal Reserve (Fed) turning hawkish and the People’s Bank of China staying dovish. While a strong U.S. dollar (USD) outlook could bring headwinds for emerging market equities, dovish policies from China and stronger current account balances for Asian countries could help weather some of the negative impact. Meanwhile, the war in Ukraine has driven commodity prices even higher on top of the global recovery from the pandemic. The lack of a clear diplomatic resolution could mean prolonged disruptions to upstream commodities supplies and proliferation throughout the global supply chain.

A Constructive Outlook
Overall, we remain constructive on Asian equities and expect returns to be driven by decent corporate earnings growth—albeit slower growth than what we saw in 2021, especially after the valuation de-rating last year. In China, regulatory policies since late 2020, as well as the recent lockdowns, are prompting further supportive policies this year. Specifically, monetary support, such as reserve requirement ratio (RRR) cuts and/or rate cuts, and fiscal policies, such as easing property market and infrastructure spending, are widely expected in order for China to achieve its GDP growth target of around 5.5% for 2022. In our view, Chinese equity markets are currently attractively valued, contingent on concrete catalysts for the broader economic recovery. Meanwhile, in Korea, the new president elect, Yoon Suk-yeol, and his administration, are known for their “pro-growth” position. We believe that this could lead to more relaxed regulations on the real estate, internet, and financial sectors, as well as accommodative and business-friendly policies.

Elsewhere, economic growth in ASEAN could outpace other global regions in 2022—especially given that ASEAN economies have reopened their borders. At the same time, a number of ASEAN countries, which are naturally endowed as major suppliers of commodities, are well-positioned against the multi-decade megatrend to transition toward carbon neutrality. The likely sustained demand for commodities such as nickel and copper presents structural growth opportunities for these countries in the longer term.

Key Opportunities
Against the current backdrop, we continue to see opportunities in Asian corporates that have exposure to secular growth themes such as technological ubiquity (digitalization and connectivity of everything), evolving lifestyle and societal values (sustainability, millennial/Gen Z consumption trends, healthy living) and de-globalization (supply chain diversification/bifurcation and reshoring). We believe the recent share price corrections in some companies have made valuations more attractive, creating opportunities to build positions in strong companies at attractive prices.

At Barings, while stylistic rotations have caused some volatility across markets, our approach remains anchored in our Growth-at-a-Reasonable-Price (GARP) investment philosophy. At the stock selection level, this approach helps us to avoid overpaying for a company’s growth, while at the portfolio construction level, it helps limit exposure to unintended styles or risks.