In contrast to ongoing recessionary forces in Europe, the UK and the US, Asia’s more supportive macro story and better growth prospects should create some stand-out investment opportunities.
In particular, income-focused investing is a lower risk approach to equity investing in Asia, especially in times of uncertainty, according to investment specialists at Fidelity.
“A focus on quality business models with robust balance sheets at attractive valuations can add defensiveness to investors’ portfolios,” said Jochen Breuer, portfolio manager for equities at the firm.
In addition to strong reasons for investing in defensive industries with stable dividends in an uncertain environment, investors can also benefit from allocating some capital to more cyclical areas in Asia, where Breuer sees a return to growth at attractive valuations.
“Amongst those cyclical sectors, we believe selective companies within financials and IT offer opportunities for investors to generate attractive total shareholder returns.”
Global bright spot
More broadly, Asia’s promising outlook is based on Fidelity’s view of peaking policy rates, ample foreign exchange reserves and more manageable inflation across the region.
This comes against a backdrop of global macro concerns dominating news headlines in recent months. And although there is potential for the US Federal Reserve (Fed) to achieve a soft landing and inflation to cool in developed markets, it is difficult to predict decisions about monetary policy.
Fidelity believes there will be delayed effects of tightening on the economy, with a base case at the firm of recession in major developed markets – Europe and the UK in late 2023 and the US in 2024.
Most Asian economies are in different monetary cycles compared with the US and Europe and have remained relatively robust under current market conditions.
“Markets like India and Indonesia have continued to see solid growth, backed by a healthy macro environment, while certain sectors in China continue to show resilience,” added Breuer.
Making dividends pay
He is also watching carefully to see which segments of the market offer compelling valuations and an attractive risk-reward profile.
“From a dividend perspective, there is an attractive mix of dividend yield and dividend growth across Asia,” he explained. “Markets like Taiwan, Australia and Indonesia [are] paying above 4% dividend yields, while lower yielding markets like Korea and India come with low payout ratios which offer scope for dividend growth.”
Ultimately, investors eyeing Asian equities for long-term capital growth should invest with a dividend-focused total return approach, by identifying quality companies with solid balance sheets and stable cash flows.
Finding value in fixed income
Uncertainty due to monetary tightening and persistent macro headwinds globally has also diverted investor attention to Asian investment grade (IG) bonds.
“[They offer superior risk-reward through solid fundamentals and a stable income stream,” explained Belinda Liao, portfolio manager for fixed income, at Fidelity.
She pointed to periods of deteriorating growth to highlight that Asian IG bonds can provide diversification benefits compared with developed markets’ IG bond options.
“As the current global hiking cycle slows, Asian IG bonds provide a good entry point for investors to capture attractive yield before the next phase of the economic cycle,” Liao added.
