Asia‘s economic growth is tipped to outperform the US and Europe in the second half of this year, thanks to domestic demand, falling inflation and supportive monetary conditions.
The consumer revival offers a particular boost amid inflation falling below pre-Covid levels and expected rate cuts as the US Federal Reserve (Fed) pauses, analysts from UBS detailed in their mid-year outlook report.
“Asia [is entering] a compelling second half with alpha opportunities ahead, such as ‘banks for the next billion’ in India, Indonesia and the Philippines, as well as Asia’s new economy leaders,” said Min Lan Tan, who heads the Swiss bank’s chief investment office for Asia Pacific (Apac).
In emerging Asia, she pointed to lower inflation and rate cuts in the second half to reinvigorate consumption. “Quality investment grade bonds and regional dividend stocks are also favoured defensive positions, as investors will need to balance seeking higher returns and hedging global risks.”
Against this backdrop, Tan along with Mark Haefele, chief investment officer for global wealth management at UBS, identify several investment opportunities to capitalise on in Asia.
For instance, they said India and Thailand have strong opportunities, while other Asean countries are seen to have equities with promising dividend stocks. Meanwhile, they noted that Japan – which has been amongst the top countries attracting investments this year following tweets by Berkshire Hathaway leader Warren Buffett – is expected to have a more bullish medium term compared with its short-term prospects.
In China, Tan and Haefele noted that while investor sentiment is negative, the risk-reward for equities remains compelling. They suggested investing in a “barbell of quality SOEs focused on reforms and dividends, plus recovery beneficiaries such as consumer stocks and competitively-positioned internet companies. The yuan should also partially reverse its slump against the [US] dollar in 2H 2023”, they added.
Aside from macro conditions, UBS pointed out seven areas for investors to focus on:
- Buy quality bonds
Lock in elevated rates with quality bonds as the Fed engages in a balancing act between inflation, full employment and financial stability.
- Look for equity laggards
With valuations among some of the best performers now looking stretched, the gap between the leaders and the laggards will likely close, benefiting emerging markets, defensives and value.
- Diversify with alternatives
Balance traditional portfolios with an allocation to alternatives such as hedge funds and private markets.
- Go sustainable
Green investment, decarbonisation commitments, consumer sentiment and regulation will likely continue to drive the case for investing sustainably.
- Seek diverse and durable income
Balance fixed income exposure through diverse income strategies like dividend stocks, US preferred securities and volatility-selling strategies.
- Position for dollar weakness
Rate differentials between the US dollar and other currencies should narrow, with the dollar’s downtrend resuming in the months ahead.
- Invest in real assets
Allocations to infrastructure, commodities and select core real estate can help with long-term inflation mitigation and provide additional diversification and income.