While many indicators point to a high likelihood of a recession in the next 12 months, the potential severity is still an open question. Asia appears to be well positioned relative to other regions in terms of inflation as the issue of elevated housing prices and labor shortages have not been as acute as it has in places such as Europe. The dynamics in China are diverging from the rest of the world and could leave its economy in a better position if monetary policy remain loose and COVID restrictions begin to ease. China’s relationship with the United States will be an important issue to watch in terms of China’s growth path in both the near and long term.”
Stephen Dover, Chief Market Strategist and Head of the Franklin Templeton Institute
On inflation outlook and opportunities in fixed income markets:
“I think inflation will prove more persistent than financial markets would like. Coming down from the 9-10% peaks is relatively easier as the energy shock fades; but bringing it all the way down to 2% will be a lot harder. The Fed will need to bring the fed funds rate to about 5.25% and keep it there long enough for the economy to cool. Other global central banks will also need to maintain a tighter monetary stance. On the flip side, I think we are only looking at a moderate recession in the US, and this will offer some support to Asia and the rest of the world. Higher yields are creating new opportunities in fixed income: it is finally starting to generate income again. Yields are likely to rise further, but as we get closer to the peak of the cycle, investment grade bonds and US Treasuries stand to benefit first.
“Looking across riskier asset classes like high yield and emerging markets, over the next few quarters I believe selective security selection will allow investors to start taking advantage of yields which in many cases are now running above 10%. At the top of my list of concerns is the fallout of a decade and a half of ultra-loose monetary policies that have led to a lot of risk taking in markets, which is now resulting in bouts of instability and volatility: think of the sudden plunge we saw in UK bond prices and FX, or the recent trouble in US crypto assets. We could get a bigger shock that hits global financial markets, and that would impact Asia as well – it’s an unknown unknown, if you will.”
Sonal Desai, Chief Investment Officer, Franklin Templeton Fixed Income
On the outlook for global and emerging market equities:
“Tightening global financial conditions and the heightened geopolitical environment have driven cross currents that created a difficult market over much of 2022. Signs of some thawing in these conditions suggest that the market outlook into 2023 will prove quite different. Investors will have to grapple between continued deteriorating fundamentals in the short term alongside attractive valuations and a more benign policy outlook as we look towards the next 12 months. This will provide attractive hunting ground globally for active stock pickers with a medium to longer term outlook.”
Manraj Sekhon, Head, Templeton Global Investments
On the outlook for Asia equities:
“We employ a bottom-up valuation-based investment philosophy and we see compelling investment opportunities in Japan amongst Asian equities, especially with the yen causing dislocations in the market. Looking ahead, Japan’s economy should prove more resilient than most developed market peers in a recessionary scenario, given the tailwinds from the COVID re-opening, weakening yen, as well as supportive monetary and fiscal policies. From a sector perspective, we are focused on domestic companies and structural themes that may enable Japanese companies to remain resilient both in this current environment and going forward such as digitalization. There are a number of Japanese companies with competitive positioning along the value chain which includes semiconductors, IT services, software and systems integrators.
When it comes to Chinese equities, a selective approach is key as market volatility may persist in the near term. We are focused on domestic companies that will benefit from long-term thematic growth drivers including rising consumption and localization. For the rest of Asia, our focus is on dividend-paying companies with the solid balance sheets and strong earnings growth to help them achieve yield, stay resilient amidst macroeconomic headwinds and serve as a defensive element for our portfolio.”
Ferdinand Cheuk, Portfolio Manager, Templeton Global Equity Group
On risks and opportunities in Asia’s fixed income markets:
“Fixed income, for the first time in decades, is offering a very sizeable income and yields are very attractive currently. Going forward in the next three to five years, fixed income is expected to offer good value. Buying high quality bonds for capital preservation, income generation and liability immunization is the way to go. Capital preservation, especially, has never been more important in a very uncertain world.
In terms of opportunities, Indonesia and India stand out as two key places to look at in the emerging world. Indonesia 10-year government bonds are seeing a 7% yield, and the Rupiah is also one of the top currencies this year. Similarly, Indian bonds are also looking interesting, with the yield of the 10-year Indian government bonds reaching over 7.25% yield as India emerges strongly from the COVID-19 pandemic and consumer confidence in the country is high. It is important to consider that a lot of Southeast Asian and South Asian countries will also benefit from the China Plus One strategy of diversification.”
Desmond Soon, Head of Investment Management, Asia (ex-Japan) / Portfolio Manager, Western Asset Management
On opportunities in the technology sector:
“While we have seen challenges in consumer levered technology sector, we are big believers in digital transformation, and we see long-term opportunities across digitalization themes such as secure cloud and SaaS (software as a service) and artificial intelligence. Secure cloud services underlie all digital experiences, and we estimate that the cloud computing market will likely reach over $3 trillion in size. Despite some brake tapping, fundamentals appear generally robust in the enterprise technology sector. Even as the world is reopening, digital learnings from the pandemic are being operationalized and extended, with companies continuing to extend tech investments to other parts of their businesses to enable more efficient operations, and that is helping to drive general resilience in the B2B side of technology.”
Jonathan Curtis, Portfolio Manager, Franklin Equity Group