Manulife Investment Management Launches its Mid-year 2023 Outlook for Asia

• The global economy may have a real chance at breaking free from secular stagnation as the real economy morphs into a productive one. Higher inflation and interest rates could be part of that structural transition. 
• Inflation across the Asian region has been relatively well contained and Asian central banks are in a relatively good position to hold monetary policy steady and expected to move to an accommodative stance in the coming quarters.
• China could see rising demand for advanced manufacturing, domestic automation suppliers amid the localization trend

Hong Kong / Singapore – Global macroeconomic conditions this year are undeniably complex, evolving rapidly in the face of recession risks, inflationary trends, central bank policies, and shifting geopolitical contexts. At its 2023 Mid-Year Outlook Media Briefing today, Manulife Investment Management revealed its investment forecasts for the months to come, including insights on the recession that is expected to be postponed and how markets and investors could adapt to lingering inflation and a more hawkish stance from central banks around the world.

Sue Trinh, Co-Head, Global Macro Strategy, Manulife Investment Management, said: “While recent data suggests a better-than-expected start to the year for developed economies, it is a case of recession postponed, not cancelled.  Three factors like significant easing in financial conditions, a continued drawdown of excess savings, and the rotation of spending from goods to services have helped underpin economic activity.  As much as we would like to predict the exact time and place of a recession, the duration of the below-trend GDP growth truly matters.  The uneven effects across sectors and geographies further complicate matters. Global growth projections appear rather lacklustre, significantly below the 3% threshold¹ that could signify a global recession.”

“Inflation also remains a significant concern. While the surge in goods prices have eased, core inflation remains stubbornly high due to strong income growth and economic resilience.  These intensifying upside risks to inflation in services, driven by tight labour supply, remain too sticky for comfort.  Central banks could remain more restrictive for longer than the market thinks.”

“Persistent price pressures have forced central banks around the world to extend their respective tightening cycles.  However, they are proving to be more hawkish than the market had hoped. In the past when central banks tighten rates followed by a pause, they tend to resume easing of rates.  Today,  policy pauses in parts of Asia have been followed by further tightening.  Given past experiences, markets may have adopted a pricing model that have been appropriate for the last 20 to 30 years, but it is no longer appropriate in the current environment. This comes to show that the previous model is no longer appropriate and markets have to stay informed of policies and everchanging issues globally.”

As the geopolitical landscape continues to evolve, so do economic strategies.  Sue expects a new regime will be seen and added: “Central banks do not and cannot operate in a vacuum.  With the evolving geopolitical backdrop, it is clear that the Western governments are reshaping their priorities to rebuild domestic industrial capacity, reduce current account deficits, enhance labour’s income share, and actively use capital to maintain hegemony.  This new regime will likely amplify geopolitical tensions and create a more zero-sum game in the global environment.”

"Despite the uncertainties in the current macroeconomic climate, including concerns about inflation and geopolitical tensions, income solutions continue to provide investors with significant opportunities. Moving forward, we see a continued emphasis on defensive, quality assets and a greater role for tactical positioning for the remainder of 2023.  Our focus remains on capitalising on the disconnect between market conditions and fundamentals in some quality franchises, thereby providing robust income solutions for investors.”

Asian investment grade bonds may offer pockets of opportunities

Over the past two years, investors looking to earn returns on excess cash have primarily chosen bank deposits to escape market volatility.  Moving forward, Murray Collis, Senior Managing Director, Chief Investment Officer, Asia (ex-Japan) Fixed Income, Manulife Investment Management sees three main themes driving Asian fixed income markets for the remainder of this year, including the Fed slowing down its rate hikes, likelihood of additional and more focused stimulus from China and potential for accommodative monetary policy stance from Asian central banks.

Murray Collis said: “We have seen the Fed’s policy tightening placing negative headwinds on fixed income return in 2022. We see those headwinds declining and potentially moving into a tailwind later this year moving into 2024 as the Fed slows its speed of tightening to assess the impact. The higher bond yields in past 18 months have created compelling long-term value for fixed income markets.”

“China’s economic recovery has slowed down during the second quarter of the year. We expect to see additional and more focused stimulus measures from Chinese policy makers, being supportive not just for China credits but Asia markets more generally for the second half of the year. We have seen evidence of an uneven recovery among the China property sector where SOE-linked developers have typically benefited more from policy easing measures by the Chinese government. We believe these developers, particularly those with stronger focus on tier-1 and tier-2 cities will likely outperform in the second half of the year. For the remainder of 2023, we are constructive on investment-grade Chinese property bonds but will remain cautious and highly selective in high yield Chinese property bonds.”

“Inflation across the Asian region has been relatively well contained as compared to developed-world counterparts; Asian central banks are in a relatively good position to hold monetary policy steady or even move to an accommodative stance in the coming quarters. Within the Asian fixed income markets, we see opportunities particularly in the short-dated Asian investment grade bonds which currently offer compelling valuations². We see Asian bonds underpinned by moderate inflation pressure and positive growth differential compared to developed markets.”

Greater China Equities continue to be a powerhouse of manufacturing and innovation

Greater China stock markets experienced an impressive rebound on cyclical drivers such as mainland China’s reopening and economic re-acceleration. Kai Kong Chay, Senior Portfolio Manager, Greater China Equities, Manulife Investment Management sees opportunities in a market that has a strong manufacturing base. The country’s growth potential and progress make it an attractive arena for discerning investors.

Kai Kong said: “Mainland China's manufacturing industry continues to grow and evolve. The country’s approximately US$4.9 trillion manufacturing economy ranked the largest (over 30%) globally in 2021, vs the US and Europe (about 16% each). Despite mainland China’s sheer size and dominance, its manufacturing GDP still showed growth momentum, which rose by 9.8% year-over-year (YoY) in 2020-21 and 7.0% YoY in 2021-22, respectively³. The nation's transformation from producing toys and textiles to pioneering the production of electric vehicles (EVs), solar equipment, and lithium batteries demonstrates its adaptability and forward-thinking approach. It is a testament to mainland China's potential in driving technological advancements in these sectors.”

“We are witnessing a shift from 'Made in China' to 'Made by China' given the rising labour costs. Chinese companies are becoming more internationalized by shifting production bases offshore to hedge against rising local labour or environmental costs in China. For example, some companies are building plants in Mexico and India, which allows Chinese manufacturers to capitalize on the economic advantages of these markets while reducing exposure to the rising costs and geopolitical risks in mainland China.”

Furthermore, the technology localization trend in China remains intact. Kai Kong added: “Mainland China's focus on technological innovation and manufacturing upgrades is propelling the trend of automation and localization. Despite shifts in low-tech industries, mainland China has strengthened its foothold in sophisticated sectors like EVs and batteries. With a self-reliant and extensive EV supply chain, it holds a unique position in the global market. While trying to balance customer proximity and manufacturing location, businesses, particularly international original equipment manufacturers, are likely to increase their reliance on Chinese suppliers, signifying a strategic shift driven by mainland China's successful localization efforts."

As for artificial intelligence (AI), Kai Kong remarked: “Within the AI supply chain, we foresee opportunities for mainland China and Taiwanese hardware firms, as well as software companies, exposed to AI infrastructure and applications. As the hardware sector anticipates a boom, software pioneers are innovating with homegrown OpenAI capabilities, integrating AI into a wide range of applications. We believe leaders with sizeable customer bases stand to benefit from subscription-based revenues via future AI applications, marking a new era of efficiency and cost reduction.”

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1 Source: World Economic Outlook, 2008: Financial Stress, Downturns, and Recoveries. 2 Manulife Investment Management Research, June 2023. 3 Morgan Stanley Research, as of 1 May 2023.