Asian equities mid-year outlook: On the road to recovery

Rising inflation and interest rates are key concerns for investors around the globe. Inflation in the US reached a 40-year high in May and still shows no signs of slowing down. The market is expecting more rate hikes. 

Asian equity’s performance in the past six interest rate hike cycles has shown Asian equity's performance has been mixed. This is different from the view that Asian markets will deliver negative performance amid rising US interest rates. 

Asia's financial position is much stronger than in the past. First, Asia's exports have seen the best recovery in the past three cycles. 

Second, Asian governments’ balance sheets are much healthier. Apart from China, which remains financially sound, Asia ex China's current balance as a percentage of GDP is more than 1.5 times that of a decade ago. 
 

Impact of China’s zero COVID policy

China's zero COVID policy has successfully combated COVID since the outbreak's start. The authorities have reiterated the stance to adhere to the policy, and so far, there is no clear roadmap to normalisation. 

The country is the global manufacturing powerhouse and is heavily involved in the worldwide supply chain. The disruption brought about by the potential stop in production and business activities will undoubtedly impact business in Asia and the rest of the world. 

Asian countries, one of the largest trading partners with China with a share of 17% and 15% of export and import, will not be immune. Korea and Taiwan are most exposed, as they are critical suppliers of technology components and have strong trading relationship with China. 
 

What are equity valuations in Asia?

However, Asia (ex-China) is reopening their economies at a swift pace. With over 80% of its population fully vaccinated, Asia's mobility has reached a new peak post the pandemic and we see room for further recovery. We expect activity in the contact-intensive services sectors to rebound quickly, lifting employment and further spurring domestic consumption. 

The relative price-to-earnings ratio (PER) valuation discount for Asian equities compared to US equities provides a better valuation cushion for Asian equities in the face of global macro headwinds.