Yet, despite the macro and market headwinds, investors can still find compelling opportunities across the Asian equities landscape.
As many developed markets continue to suffer under the weight of heightened geopolitical tensions, and spikes in energy and commodity prices, for instance, some Asian economies are likely to be more resilient to escalating inflation pressures.
For example, Barings sees commodity-exporting countries in Asean, such as Indonesia and Malaysia, as being able to mitigate inflationary pressures with subsidies. Many economies in this region are also continuing to re-open, in turn easing labour conditions.
“While the impact of inflation on demand needs to be monitored, we expect the medium to longer-term outlook for Asian equities to remain attractive, as the region is supported by structural growth potential and demographic benefits,” said SooHai Lim, head of Asia ex-China equities at Barings.
More specifically, he added, opportunities can be found in Asian companies with exposure to secular growth themes such as technological ubiquity, evolving lifestyle and societal values, and de-globalisation.
Bottoming out in China
In China, meanwhile, equities have been slumping to their lowest levels since 2020. Influencing factors such as regulatory crackdowns on after-school tutoring and online gaming, combined with monopolistic practices in the e-commerce space and the deleveraging in the property sector, have dampened growth prospects for the Chinese economy and domestic consumption.
These have been made worse by a zero-tolerance Covid policy and the war in Ukraine exacerbating existing supply chain challenges.
Yet Barings believes the market has now priced in the majority of the downside and pessimism.
“There is a case to be made that China is one of the more attractively valued markets, given that its medium- to long-term structural growth thesis, in our view, remains intact,” said William Fong, head of Hong Kong China equities at the firm.
At the same time, the government has pledged support for the housing sector, and property shares have rebounded considerably from their lows in March.
“Dozens of cities have already rolled out relaxation measures in the past two months to support local demand, such as reducing purchasing restrictions and lowering down payment ratios,” Fong explained.
Even with banks asked by the government to maintain loans to developers, however, it might take some time for the sector to rebound in any fundamental way.
“Ultimately, an outright recovery of the sector will be contingent upon the government’s Covid response, meaningful relaxation of policies in major cities, and progress in debt restructuring for some of the larger and more troubled developers,” added Fong.
An eye on the downside
Investors also need to be wary of certain risk factors. Among them is a potentially overly-aggressive tightening by the US Federal Reserve, which Lim said could lead to a recession.
A stronger US dollar is another potential headwind for Asian equities. “The energy crisis in the EU and policy tightening in the US, combined with China’s economic soft patch, may also lead to weak external demand for more export-oriented economies like Taiwan and Korea,” he explained.
Geopolitical risks will also be front-of-mind. “While the long-term impacts of the war are impossible to quantify at this stage, it is possible that things could escalate before getting better, resulting in further volatility across markets going forward,” Lim warned.