Zhikai Chen, Head of Asia Equities at BNP Paribas Asset Management, notes that a number of factors justify their hopes for “a better year after the challenges that 2021 brought to Asian equities, and northern Asian equities in particular.”
Chen writes in a blog post that most Asian economies, as well as many global emerging markets, will be “coming into 2022 from a low base.”
He adds that the recovery in many Asian economies was “hindered by the resurgence of the Delta variant over the summer, resulting in more sustained lockdowns and travel restrictions.”
Although this marked a reversal of what happened last year, when Asian economies handled Covid better, this low base should offer tailwinds to the recovery “alongside other factors such as brighter household finances that were supported by fiscal measures.”
Chen pointed out that we should also note “the positive wealth effect that fiscal and monetary support has created in many developed economies and the boost to demand that has engineered.”
That should “rub off on a lot of emerging markets,” Chen predicted.
He added:
“On the pandemic, while the implications of the emergence of the Omicron variant are still being assessed, this time around vaccination rates are much higher than they were at the time of the Delta outbreak. That should limit the need for drastic containment measures and by extension the disruptive impact on economies.”
Chen further noted that after a slow start, economies such as Singapore and Malaysia are among those that have “vaccinated the vast majority of their eligible populations.”
Dealing with Fed action in 2022
Of course, there are some concerns as well, Chen acknowledged.
What about the outlook for inflation? How will central banks react?
Here, we believe that “the balance sheets of most Asian emerging economies are quite healthy, so more resilient when compared to these of the economies of eastern Europe, Africa and Latin America.”
The outlook, though, will “depend on the pace and the extent of US interest-rate increases, especially given the recent more hawkish comments from the Federal Reserve chair on inflation,” Chen added.
He also noted that if the Fed’s monetary tightening “comes amid robust economic growth of 3% to 4%, it would reflect the strength of the US economy.” The impact on growth, and demand, should be “contained in most Asian economies, and in the wider financial markets, since the rate rises should be limited to the first half of 2022.”
If, however, inflation remains “sticky at 4% to 5%,” the Fed could be seen “as being behind the curve, policy action might stretch into the second half of the year and markets would react poorly.”
Whatever the scenario, two economies “look more vulnerable: Indonesia and India fund a larger part of their financing requirement in hard currencies such as the US dollar and that currency exposure leaves them susceptible to a higher financing cost as a result of rate rises.”
Regulatory concerns and the listings pipeline
Another potential “cloud on the horizon is regulation in the technology sector where particularly in China we have seen Beijing impose tighter rules on sectors ranging from ride hailing to ecommerce.”
Chen added that this has left Chinese internet companies “trading at a deep discount.” Regulatory risk could “raise questions over the valuations of other companies coming to the market, not just in China, but elsewhere in Asia,” Chen claims.
He added:
“There is a silver lining to this cloud: away from the Chinese internet giants, we are seeing other big players emerge outside of China as Asian companies replicate the business models of the Chinese majors in countries such as India, Singapore, and Indonesia. Here, e-commerce is deepening.”
This is allowing investors to “tap into the same type of structural growth that has been observed in China,” Chen explained while adding that they should also be “aware that valuations are not low as they try to benefit from the potential for strong growth in these sectors.”
As for the deep valuation discount in China, “we believe it might take a few more quarters before the regulatory action is completed.”
He also noted:
“We will then need to assess the guidance of Chinese internet companies as regards a stabilization of the regulation and their growth outlook. We expect ecommerce to continue to penetrate Chinese life. Overall, then, the risks for Asian and global emerging market equities going into 2022 look manageable to us at this point. These economies do not have the firepower that developed economies have, so the challenge for policymakers will be how to balance the gradual withdrawal of the extraordinary fiscal measures. Overall, though, we are cautiously optimistic.”
