What a difference a year makes.
In the Asia-Pacific region, the cautious optimism and resiliency of 2021 has become clouded by pressures both global and domestic — and investors are looking for clarity.
“The last twelve months have been particularly difficult in APAC, which has felt all three of the major global equity market headwinds: Ukraine, inflation, and Covid-zero constraints on growth,” said Martin Yule, head of Asia-Pacific research at UBS.
Additionally, second order effects like commodity price strength, supply-chain issues, and food inflation are conspiring to dampen growth and optimism in the region. “With some very significant issues to resolve, 2022 looks like a year of volatility and uncertainty,” he said.
All of this means the buy side is focused on the global macro themes of the day and how they impact investing, according to Citi’s Brent Robinson. “There is plenty to worry about so far during 2022 — inflation, stagflation, monetary policy tightening and interest rate hikes, the rising dollar, China policy, supply-chain disruptions, oil, geopolitical risks in Europe and elsewhere, and the probability of a coming recession,” he said. “Revert back 12 months ago, and only a couple of these macro concerns were being considered.”
The past year has been a “challenging” one for the markets, concurred Erica Poon Werkun, head of Asia-Pacific securities research at Credit Suisse. “Not only have valuation benchmarks corrected with rising bond yields, triggered in turn by the sharp rise in global inflation, global growth has emerged as a new concern, particularly after the Russia-Ukraine conflict started,” she said.
As has happened in the past, investors have pulled funds out of emerging markets in response to the uncertainty. This includes those in Asia, with concerns about the region’s economy accentuated by its dependence on importing its energy needs. (Energy exporting economies such as Indonesia and Malaysia have done better so far.)
“In general, though, compared to the previous episodes of Fed tightening, EM Asia is likely to be much more resilient – the economies are much larger, with stronger macroeconomic health,” Poon Werkun said. “Once Covid lockdowns are lifted, revival in the Chinese economy itself can be a boost for the region. India, too, has several underlying growth drivers such as a reviving real-estate construction market, and unexpectedly strong growth in services exports.”
A major feature of Asian markets since February 2021 has been the relative underperformance of China and growth stocks, according to William Greene, head of Asia research at Morgan Stanley. “As a result, investor participation has been broader across a much wider range of markets, sectors, and styles than in the prior period,” he said. “For example, ASEAN markets and India have significantly outperformed whilst value stocks and energy/materials names have also done well. Fortunately, our strategy and quantitative research teams were early in identifying these shifts in performance, which have been amongst the largest on record.”
This effort was not lost on investors who have once again identified Morgan Stanley as the region’s top equity research provider, according to Institutional Investor’s 29th annual All-Asia Research Team survey.