What impact will a potential softening US dollar have on Asia?
Asia’s stability and success, to some degree, rests on the diversity of countries within the region. Some economies enjoy strong domestic demand while others are leaders in global industries. Asian economies, such as China and India, benefit from an increasing pool of wealthy domestic consumers and a growing services and consumption economy. Korea and Taiwan are both technologically advanced economies that are embedded in the global supply chain. Both are major exporters and as such a softening US dollar could see a reversal of favourable margin tailwinds enjoyed last year by major exporters.
Manufacturing hubs such as Vietnam and countries which are more tilted towards commodities, such as Indonesia and Malaysia may be more impacted by fluctuations in currencies, however, their sensitivity to the US dollar may lessen as these countries seek to replace US dollar denominated debt with local debt. Indeed, many Asian countries have become less vulnerable to external factors through an accumulation of FX reserves and a much-improved risk profile and most big emerging economies went into the 2008 financial crisis with current accounts and foreign-exchange reserves in surplus and dollar liabilities better matched with dollar assets than in the past.
What is the best way to position portfolios in relation to China’s reopening?
We believe Chinese equities are very attractively priced in both absolute and relative terms and many companies offer a favourable earnings outlook in 2023. China has had a very different economic cycle compared to other major economies and the reopening since mid-December 2022 marked the end of a downcycle that started from the second half of 2021. The Chinese equity market bottomed in early November 2022, yet its valuation is still below its own long-term average and close to a record-high discount relative to global equities. This backdrop has provided investors with interesting opportunities in both growth and value stocks as China offers strong tech growth and demographics, which could favour long-term growth as well.
Within China, we are positive on consumption and select travel-related stocks. There is both near-term pent-up demand as well as long-term structural wealth driving growth for the travel industry. Airlines, airports and hotels are all asset-heavy businesses with high operating leverage and are likely to deliver strong earnings growth in the recovery phases.
Some international leisure and luxury companies are also well-positioned to benefit from the return of Chinese tourists. However, for example, we are more conservative on renewables and EV-related stocks, which were seen to be a relative safe haven for Chinese equity investors and resulted in crowded trades. Despite the recent pull-back, these sectors still trade on expensive multiples while growth is decelerating along with potential downside earning risks.