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How might investors navigate Asian markets in the year of the Ox

As the upcoming Chinese New Year ushers in the Year of the Ox, could it be the year Asian economies power ahead? Franklin Templeton Investment Solutions’ Stephen Tong, Franklin Templeton Emerging Markets Equity’s Michael Lai, Western Asset Management’s Desmond Soon and Martin Currie’s Kim Catechis share their views

Ahead of the new lunar year, they weigh in on how investors might navigate Asian markets with the characteristics of the Chinese zodiac’s ox in mind, traditionally associated with patience, diligence and persistence. The ox is the second animal in the 12-year cycle of the Chinese zodiac. Its arrival on February 12, 2021, a year after COVID-19 came to light across the world, comes at a time where there is elevated uncertainty among investors over the pace of global growth. While a full global recovery is unlikely, there may be some potential bright spots in Asia.

 

Transition from Crisis Measures to Supporting Recovery Shines New Light on Asset Allocations

 

Stephen Tong, Client Portfolio Manager, Franklin Templeton Investment Solutions

“The global pandemic has pushed the global economy into a deep recession, though the market has widely factored in the expectation of a sharp economic rebound. There’s a huge divergence over the pace of global growth. The recovery path will likely be uneven, especially between the East and the West. We believe Asia is on a better path of recovery and that China in particular should be on track for a strong rebound and on-trend growth over the mid to long term. This is a reflection of the ox’s diligent role in Chinese agriculture.

“Central banks around the globe remain accommodative and maintain a “whatever it takes” attitude to keep interest rates low. We’ve been impressed at the targeted stimulus measures, particularly in China. The People’s Bank of China’s (PBOC’s) prudent response to the effects of COVID-19 last year freed up billions in reserve requirements for banks, which in turn funded loans to help the worst-hit companies from the virus outbreak. That said, it’s unlikely Chinese equities will lead the way alone, and we think the winners and losers may change depending on how quickly and effectively a vaccine can be rolled out. We’d expect opportunities to arise for some undervalued names.

“On the fixed income side, we’ll have to be more selective. A combination of low term premiums in contrast with continued easy monetary policy maintains a challenging environment for fixed income investors. But, emerging market fundamentals, especially within Asia, have improved in recent months as foreign demand offsets continued domestic weakness in certain economies. In our view, emerging market local currency bonds could become more attractive.”

Bonds Have More Room to Run

 

Desmond Soon, Head of Investment Management, Asia (ex-Japan), Portfolio Manager, Western Asset Managementpart of Franklin Templeton Group

“One might consider 2020 to be the year of the poisoned rat, but as we enter the year of the ox, we have reasons to think we’ll see a stronger year marked by hard work. We generally have strong convictions on Asian currencies and local currency bonds. While flows into Asia dollar bonds had taken off significantly throughout last year, local fixed income bonds and equities have lagged, and we think they have room to catch up.

“A number of Asian economies are net-creditor nations, those that invest more in other countries than others invest in them. As major Western economies monetize their debt to support their economies from the financial effects of the global pandemic, local Asian economies and their currencies will likely be a sweet spot for 2021—particularly currencies that are linked to countries with strong export growth, in our view. Container prices have surged, particularly in Chinese ports—which illustrates this strength in exports. While pandemic-induced supply bottlenecks have played a role, this growth is due to overwhelming demand. Despite the encouraging evidence, we believe emerging market local currency debt remains underappreciated by investors, as seen in the chart below.