KUALA LUMPUR (Jan 20): Manulife Investment Management (Manulife IM) says Malaysia’s accelerated vaccination rates, which was faster than what the market had anticipated, combined with increased government spending ahead of the next general election could support domestic demand amid the lingering effects of the pandemic.

At a media briefing on Thursday (Jan 20), Manulife IM’s Head of Macro Strategy (Asia), Sue Trinh said the outlook for Asian countries in 2022 is a mixed bag as the cyclical macro conditions are favourable for reopening and recovery in Taiwan, select Asean countries such as Vietnam, Indonesia, Thailand, Singapore and Malaysia, as well as Japan.

“Structurally, the Asian region has a lot of work to do to recoup lost output due to the pandemic. The biggest concern remains weak consumer demand which will be exposed by the looming downturn in export growth.

“On the other hand, Asia’s milder inflation expectation comes down to one simple factor — trade surpluses. Maximising export production remains the marginal growth driver through the pandemic. At the same time, re-opening and pent-up demand pressure has not been as strong, while household consumption growth has rebounded much faster in other regions compared to Asia,” Trinh highlighted.

Trinh added that the persistent negative output gaps — which indicate weak consumer demand — in Asian economies are likely to keep price pressures manageable.

Even if supply chain shortages continue to worsen, Asian economies are likely to escape inflationary pressures as food price inflation in the region is much lower, while they experienced fewer disruptions caused by the pandemic compared with other emerging market economies.

For the Asia region as a whole, Trinh says Manulife IM expects to see policy normalisation occurring at a much slower pace and of lower magnitude relative to previous cycles and other emerging markets economies.

Meanwhile on the equities markets, Manulife IM’s Senior Portfolio Manager for Asia Equities, Kenglin Tan said that the emergence of the Omicron variant, China’s regulatory tightening cycle and central banks’ actions further impacted the growth in Asian equities entering 2022.

She said they are positive on Southeast Asian markets as they expect the gross domestic product (GDP) growth in China to slow from 8% in 2021 to around 5% in 2022, which is lower than the growth projection for Southeast Asia.

“Our positive outlook for Southeast Asia is further propelled by the 6% to 7% expected growth momentum in India. In addition, our positive view towards the sub region is further reinforced by the higher real yields in major economies, namely Indonesia and India, which are attracting capital flows.

“Given the previous tensions between China and the US, we believe that Southeast Asia will be a strategic beneficiary, at least over the medium term, as there may be foreign direct investments in specific sectors. These include battery suppliers in Indonesia, auto companies in Thailand, and IT supply chain in Malaysia,” Tan said.

Tan also noted that while the physical integration among the Asean countries is not as satisfactory as expected, the digital integration within the bloc has been more encouraging as there are over 30 tech unicorns due to go public, which are expected to extend to fintech, logistics providers, and e-commerce players.

“These companies share two features — the business lines of unicorns which will adapt more readily for regionalisation, and Asean governments’ fewer regulations on industries like e-commerce, internet and e-gaming.

“The near-term outlook for Asean is expected to improve as economies reopen, with most of the bloc’s countries relaxing movement and travel restrictions, albeit gradually. Strategically, Southeast Asia should play an important post-pandemic role in Asia’s economic trajectory.

“The ‘China Plus One’ initiative has encouraged multinational companies to diversify their business lines and production bases into regional markets,” Tan concludes.

Manulife IM’s Senior Portfolio Manager for Asia Fixed Income, Paula Chan said that a divergence in performance between investment-grade and high-yield credits was evident due to the gradual recovery from the pandemic amid regulatory changes and unusual risk in the Asian fixed income markets.

“We believe that Asian high-yield bonds offer particularly attractive valuations, with bond yield spreads well above historical averages, providing significant opportunities this year. Overall, we see global liquidity to remain relatively accommodative from a historical perspective for Asian credits in 2022.

“We believe that some credits, especially in the high-yield segment, are excessively priced to the downside. Indeed, price dislocations, particularly in the China real estate sector, that were experienced in 2021 do not reflect the underlying fundamentals of higher-quality developers,” Chan said.

Chan added that supply and demand on the environmental, social & governance (ESG) front has proven that there has been a growing popularity of sustainability-linked bonds in the Asian sustainability bond market with around one in five bond issues in the Asia-Pacific (excluding Japan) region being an ESG bond.