Eastspring Investment: 2023 HY Outlook

June 8, 2023

In their 2023 mid-year outlook titled 'Positioning for the end of the rate hiking cycle', Eastspring Investments shares their views on the global economy, asset allocation strategy, as well as opportunities in equities and bonds across Emerging Markets and Asia for the second half of the year. 

Peak Fed hawkishness and peak inflation is expected to be within the second half of this year, and the current slowdown in the global economy suggests that we are close to the end of the rate hiking cycle in most economies. Key takeaways of this Outlook include:

Macro

• As the US economy absorbs the full impact of the Fed’s tightening, the leading variables we monitor point to a US recession potentially in the next six to twelve months. Any recession is likely to be shallow as household and non-financial corporations’ balance sheets remain relatively healthy.
• Investor optimism surrounding China’s re-opening has been tempered as the rebound momentum appears to be easing. China’s consumption-led recovery will have limited positive spillovers for the rest of Asia although Thailand and Singapore should benefit from higher tourist spend from China.
• Inflationary pressures have been more benign in Asia helped by slower gains in goods and energy prices. Barring unforeseen shocks, the end of Asia’s rate hiking cycle seems in sight.

Asset allocation and currencies

• Global equities may still benefit from a decent growth environment in the near term, but downwards earnings revisions could be a risk.
• Rising recession risks in the US and some parts of the developed economies plus disinflationary trends globally may provide a more constructive backdrop for high quality bonds and duration in the second half of the year.
• The recessionary environment will drive investors to safe-haven currencies such as the US dollar.  

Emerging market/Asia equities

• Generally healthy macroeconomic fundamentals and medium-term earnings drivers such as supply chain rebalancing, a pickup in capex in real economy sectors, and increased decarbonisation and infrastructure spending bode well for the region.
• Many Asia ex Japan markets are still trading below their 5-year averages and remain underrepresented in global indices.
• Potential earnings upside and further investor inflows should be supportive of the Chinese equity market.
• India is on track to be the fastest growing major economy this year and the equity market has been enjoying rising portfolio inflows in recent months.
• Ongoing corporate restructuring in Japan continues to enhance shareholder value and the long-term upward trajectory for earnings and margins remains intact.

Emerging market/Asia bonds

• 2023 is shaping up to be a better year for fixed income, with improved performance due to moderating inflation, ongoing recession fears and major central banks nearing the tail end of their hiking cycles.
• While the US Fed policy has a large impact on Asian central banks’ behaviour, we expect some to start easing should the balance of risks tilt from inflation to recession.
• Valuations for Asian bonds vary across the rating curve with the AA and A names looking cheap compared to AAAs and BBBs/BBs. We see the most value in Asian financials and selective high yield names.
• We expect Asia and Gulf Cooperation Council countries to dominate the Emerging Market bond recovery and broadly prefer sovereigns over corporates.