Asian markets face headwinds from global trade tensions and a rise in volatility but the region's positive long-term economic and financial fundamentals should act as a buffer, Manulife Asset Management said in its regional outlook for the second half of 2018.
“We have seen relatively few changes in Asia's fundamentals since markets became more volatile in February,” said Mr Geoff Lewis, Senior Strategist, Asia, at Manulife Asset Management. “The economic data for Asia suggests that activity remains broadly stable.”
Global financial markets have experienced greater volatility as uncertainties multiplied in first half of 2018, fuelled by political worries in Europe, trade tensions between the US and China, increasing financial risks in some emerging markets such as Argentina and Turkey, and fears that a more hawkish US Federal Reserve will raise interest rates by more than markets can bear.
Asian markets were relatively resilient against this unpromising backdrop until May. But in June, fears of a stronger dollar and higher US interest rates, coupled with the US-China trade conflicts, hit sentiment heavily in Asian equity markets. If markets weaken further, it can be seen as a good long-term buying opportunity, says the report.
The positive investment case for Asia is well supported by a number of factors:
- Structural increase in return on equity
- Better capital expenditure discipline
- Rise of the Asian middle classes and high-spending millennial generation
- Positive growth differential over developed markets thanks to regional economic powerhouses China and India.
“Economic growth for Asia ex-Japan in the first quarter of 2018 rose a little, boosted by the data from Hong Kong, India, the Philippines, Singapore and Thailand, which all showed sequential improvement,” Mr Lewis said. “Export numbers have also improved, though recently purchasing managers’ indices for new export orders have fallen back. Should Asian exports weaken in the second half of the year, domestic demand remains solid across much of Asia and will act as a buffer.”
Asia remains a dynamic player in the current global economic expansion, which is not under any immediate threat of rolling over. Updated forecasts for the global economy for 2018-19 by the Organisation for Economic Cooperation and Development in June pointed to expected growth of close to 4%.
Despite the geopolitical and trade risks, investors should expect a continuation rather than an interruption of global growth on a six- to 12-month horizon and plan their investments accordingly. Global growth continues to draw fundamental support from the US and China. The world's two largest economies are more driven by domestic demand than exports, though the focus on import tariffs tends to obscure this. US growth is on a solid footing, given the strong job market, robust corporate profits and sound financial sector. While China’s growth is set to slow modestly, the latest data shows that upgrading in the manufacturing sector is continuing at a steady pace.
Even if the US-China trade frictions remain, China’s greater integration into the global economy will continue apace, with or without the US. China is now a top 10 trading partner for more than 100 countries that account for 80% of global gross domestic product. Chinese imports in aggregate are expected to grow at a healthy pace, supported by firm domestic demand. Meanwhile, US import demand will stay strong thanks to robust domestic spending and the recent rebound in the dollar which boosts real national disposable income via cheaper imports.
Manulife Asset Management is the global asset management arm of Manulife Financial Corporation (Manulife). It provides comprehensive asset management solutions for investors across a broad range of public and private asset classes, as well as asset allocation solutions.