Thomas Poullaouec, T Rowe Price
Active investors with a disciplined focus on valuation and fundamentals can find attractive investment opportunities across asset classes and markets, including in emerging markets value stocks and Asia credit, according to Baltimore-based T Rowe Price.
“There are three key worldwide distortions that we are expecting to fade off in the next year: behavioural changes in the aftermath of the pandemic; monetary and fiscal policy distortions; and ongoing policy reforms in China,” Thomas Poullaouec, head of multi-asset solutions, Apac, told a media briefing last week.
“This will mean better supply chains, more workers willing to work, more moderate inflation, and ironically higher interest rates.”
However, inflation remains elevated, central bank missteps are possible as massive monetary stimulus is unwound, and China’s growth is moderating while supply chain bottlenecks are still weighing on global economic activities, he warned.
Despite these risks, T Rowe Price believe that global growth was delayed but not derailed in 2021, paving the way for the recovery to extend in 2022.
“Supported by our constructive outlook over the next six to 18 months, we continue to favour shorter duration and higher yielding sectors in fixed income through high yield bonds, Asia credit and bank loans,” said Poullaouec.
“Within equities, we are tilted toward value-oriented stocks and emerging market equities as we expect cyclically exposed companies to benefit from a supportive global growth profile, coupled with pent-up demand and inventory rebuilding as Covid concerns abate.”
Emerging markets
His colleague, Ernest Yeung, portfolio manager of the Emerging Markets Discovery Equity Strategy, argued that the stimulus directly targeting the consumer, a new capex cycle prompted by the post-Covid energy transition, and that deglobalisation trends will all provide long-term tailwinds for emerging markets value stocks.
“We believe that something has changed. First, by providing more support directly to average people instead of big banks and zombie companies, the way central banks and governments deploy fiscal and monetary stimulus during and after the pandemic marks a fundamental change from previous recessions,” he said.
“Second, with the deglobalisation trend, China is no longer exporting deflation in the form of cheap goods to the rest of the world contributing to inflationary pressure. Lastly, we think that the transition to green energy will fuel the next capex cycle.”
Yeung expects that the post-Covid energy transition-led super capex cycle may boost demand for many traditional and old economy industries. The world will likely need to spend heavily on commodities such as copper, nickel, lithium, aluminum, and natural gas as alternative energy and electric vehicles are metals‑intensive. “The amount of financing required to support the green transition is also likely to open up new business opportunities for the banking sector,” he added.
Asia credit
Meanwhile, despite recent volatility within the Asia high-yield bond market, Sheldon Chan, portfolio manager of the Responsible Asia Credit Bond Strategy, remains positive on the diversification benefits and strong potential for long-term returns from Asia credit.
“The Asia dollar bond market has grown significantly, outpacing the rest of emerging markets and is now a $$1.3trn asset class. It is favoured by Asia-based investors particularly during uncertain times for its attractive potential risk-adjusted returns and diversified sector mix,” he said.
Chan highlighted that the regulatory actions in China hit investors’ confidence in the short-term— but there are silver linings for bottom-up credit investors. “We don’t expect fundamentally sound Chinese issuers to face sustained credit stress, and they would likely end up with healthier balance sheets in the medium-term.”
