Slower pace of rate hikes a boost for Asian assets

Developed market central banks adopted a hawkish pivot in December. The US Federal Reserve announced that it would end its bond buying programme earlier and signalled three interest rates hikes for 2022. This was quickly followed by the Bank of England’s first interest rate increase in three years and the news that the European Central Bank would begin to taper its asset purchase programme. In our 2022 Market Outlook, we highlighted that 2022 would be a “normalisation year” where monetary and fiscal policies start to become less supportive for global growth, particularly for the developed markets.

Consensus forecasts seem to suggest that the pace of tightening would be more moderate in Asia. The Reserve Bank of India, for example, kept rates on hold and reiterated an accommodative pro-growth stance.

Meanwhile, after the Central Economic Working Conference, the People’s Bank of China is likely to pursue monetary easing to stabilise growth in 2022. More recently, the Bank of Japan kept key policies unchanged and pointed out that Japan’s inflation was nowhere near the red-hot levels seen in the US, UK and the Euro area.

On balance, monetary policy is expected to be more accommodative in Asia versus the Developed Markets. This should be helpful for Asian assets, especially in those equity markets where valuations appear more attractive compared to the US’. In our 2022 Market Outlook publication, we highlighted selective opportunities within Japan small caps, value stocks in the Emerging Markets, as well as beaten up technology stocks in China. We also see opportunities in the region’s Electric Vehicle (EV) manufacturers and EV supply chain, as well as renewable energy bonds.

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Source: Bloomberg. Consensus forecasts. December 2021. Central bank policy rates. China – 1 year best lending rate.

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