Wealth managers set out their forecasts for markets and investments in and around the Asian region for next year.

As the end of the year comes over the horizon, wealth managers’ thoughts turn to what the following 12 months have in store. And what of the Asia region? There remain question marks over China, as the International Monetary Fund has suggested in a report this week about the country’s financial system. More positively, though, Asia-Pacific has seen a continued rise in wealth – explaining why the private banking/wealth sector is bullish on the region. Here is a selection of views from firms about the region. We will be running more outlooks in the coming days. Email tom.burroughes@wealthbriefing.com

Aidan Yao, senior emerging Asia economist, and Shirley Shen, economist – Emerging Asia excluding China, AXA Investment Managers 
They see a strong and synchronized global recovery and stabilization in China. They also expect a transitioning of growth drivers from external to domestic demand: growth impulse from exports will ease but it will remain “decent” in 2018, due to lower Chinese demand and a normalizing tech cycle. The firm also expects stronger domestic demand, supported by positive sentiment, accommodative policy and growth-enhancing reforms, will help to pick up the slack, ensuring steady headline growth.

AXA IM also sees inflation bottoming out next year, with price pressure building in 2018. “Consumer Price Index inflation appears to have bottomed across the region, and should rise next year due to normalizing food prices and closing output gaps.”

The economists also expect central banks to start to normalise policy. “In light of strong growth, closing output gaps and rising inflation pressure, Asian central banks will start to lift off from record-low interest rates,” they said.

“Korea and Philippines appear to be leading the process and should act before year-end, while others (except for China and Thailand) will follow in 2018. A broad-based shift towards policy normalisation will play out in the coming months. The pace of this normalisation will, however, be gradual, as central banks are still cautious about the durability of Asia’s recovery.”

As far as risks are concerned, China tops the list, because of its influence on its Asian neighbours. Risks of a China “hard landing” should be treated with caution and seriousness by Asian investors, AXA IM added. 

Citi Private Bank
“After the strong gains in emerging markets in 2017, there may be a temptation to believe the best of the gains are already behind us. Our view, though, is that EMs may offer long-term outperformance potential and that many investors may not have enough exposure to EMs.”

“Overall, EM equities and fixed income are cheap compared to their developed counterparts, as are the currencies in which they are denominated. Our recommended approach is to have a broadly diversified allocation to EM securities, reflecting our overweight to all EM asset classes in every region.”

“Emerging market assets have also performed strongly. The MSCI Emerging Markets Index has delivered a total return in US dollar terms of 31.3 per cent, outstripping the 18.1 per cent gains in developed market (DM) equities, as measured by the MSCI World Index. Likewise, EM local currency government bonds have achieved a gain of 10 peer cent in US dollar terms while dollar-denominated EM bonds have returned 7.5 per cent. Not only are EM equities and fixed income cheap comparedto their DM counterparts, so are the currencies in which they are denominated. That is despite an 5.5 per cent rally in a basket of EM currencies in 2017. This appreciation saw US dollar denominated investors who followed our EM overweight recommendation experience both price and currency gains. Over time, we believe this move likely has further to go. Real effective exchange rates across EMs – a measure of a currency’s inflation-adjusted value against a basket of other currencies – are still generally below their long-term averages.”

“There is much more to our case for EMs than just attractive valuations. The fundamental outlook is also improving across many EMs. In 2017, Citi Research estimates that GDP growth for EMs as a whole accelerated from 3.9 per cent to 4.7 per cent. It now forecasts that growth will increase further to 4.8 per cent in 2018 and maintain that pace in 2019. The prospect of continuing cyclical recovery provides a compelling reason for adding exposure to EM assets.”

Bank of America Merrill Lynch
“Higher US rates, a higher US dollar, ECB tapering and Chinese slowdown mean investors will need to be more selective in emerging market bonds and equities, which outperformed in 2017. We maintain our bullish view on emerging market equities into 2018 and expect Asia/EM equities to double in the next two years. Political risks come to the fore with heightened volatility around uncertain geopolitical tension, the outcome of key presidential elections in LatAm, and the renegotiation of the North America Free Trade Agreement.”

Dale Nicholls, portfolio manager of Fidelity China Special Situations PLC
“We are currently in the midst of a clear cyclical upturn in the economy. Supply-side reform in areas like steel and cement has helped lift pricing across a range of commodities. On the policy front, there is increasing rhetoric focused on the risks associated with the build-up of credit we have seen in the economy. This focus could become stronger post recent leadership changes – all positive in addressing our major concern for the long-term health of the economy.”

“The environment remains positive for ongoing growth in consumption as part of the natural expansion of the middle-class, a key investment theme for the portfolio. While market sentiment has clearly turned more positive to the risk-reward balance around the opportunities in the Chinese market, we still find good value relative to the long-term growth potential.”

Nicholas Price, portfolio manager of Fidelity Japanese Values PLC
“Corporate fundamentals and valuations - Japanese market is relatively cheap globally and earnings environment is positive so I expect reasonable upside to market in 2018. However, there are signs of peak momentum in the ISM so I am looking at companies that can grow steadily and on reasonable valuations. Bottom up and individual company’s fundamentals will be increasingly important as the growth slows down. Key events are the reappointment of Kuroda, Governor of Bank of Japan (BoJ) in April 18 and whether BOJ starts to taper more in 2018. Japanese labour market is relatively tight so I am looking at companies that can benefit from that and growth markets such as med technology.”