Although developed markets have had a better start to the year, HSBC Asset Management thinks emerging markets, especially in Asia, will play catch up during the second half.
“Growth in Asia will be adversely affected by the slowdown in global trade as Western economies lurch into recession, but the region will also benefit from strong tailwinds to boost activity,” said Cecilia Chan, chief investment officer for Asia Pacific at HSBC Asset Management.
“Benign inflation amid a trend of US dollar weakness and a Fed pivot leaves room for central banks to ease monetary policy in a meaningful way.”
Asian equities have better valuations than their developed market counterparts, HSBC Asset Management noted, and there is also likely to be further room to buy as they are still early in their earnings downgrade cycle.
Caroline Yu Maurer, head of China and specialised Asia strategies, noted that current valuations in China are at their lowest levels since 2019.
The Chinese market is also supported by a number of tailwinds, such as monetary easing, easing of Covid restrictions and a receding in ADR delisting concerns.
“Investors may currently be too bearish on the Chinese economy and have priced in too much downside risk,” she said.
Meanwhile, the asset manager believes developed markets face headwinds with the US and Europe likely to be heading into recession in the last quarter of this year and the first quarter of 2024 respectively.
For those investing in developed markets, HSBC believes there are more opportunities within fixed income compared with equities.
In fixed income, the asset manager believes Asian credit, both investment grade and high yield, provide attractive diversification benefits for investors.
“With much lower levels of inflation than the West and better prospects for growth, default rates in this part of the world should be well-contained,” said Alfred Mui, managing director and head of Asia fixed income investment management.
“Within the high yield market, Asean bonds look compelling and are supported by improving fundamentals and loosening local credit conditions, while we remain selective on investments in China’s real estate market.”
For longer duration investments, Mui favours Taiwan and Korean bonds, which are set to benefit as the information technology sector is expected to recover in the second half of this year.
After the Chinese property crisis, Mui identified short-term opportunities in the Asean high-yield market, such as India and Indonesia, as there is ample liquidity in the local banking sectors there and there is the prospect for currency appreciation.
