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A more benign inflation backdrop; policy opportunities and risks

Asia’s benign inflation backdrop compared with the West means that its central banks can afford to be more accommodative, as demonstrated by the surprise cuts by the People’s Bank of China at the end of August. We expect China’s monetary policy to continue easing in the near term, supporting recovery from zero-Covid policy and the distress related to property sector reform and other common prosperity initiatives.

Japan also appears committed to its policy of extremely low rates, although we are closely monitoring any potential changes in its yield curve control (YCC) regime. Any shift away from YCC could lead to unintended consequences for the Japanese yen and potentially add another layer of risk to the already extraordinary level of volatility in FX markets, which has already prompted intervention from the Bank of Japan last month.  

China - All eyes on the Party Congress 

As Europe and the US wrestle with tightening policy and potential recession, activity in China has been improving, albeit the path has been halting. We believe sentiment could improve further following October’s 20th Party Congress. While President Xi is likely to retain all his leadership positions for an unprecedented third term, adjustments in other leadership ranks could offer clues for the forward path of economic policy and serve as a catalyst for a more progressive growth policy. 

Expectations heading into the Congress remain muted, meaning any positive news around leadership positions or zero-Covid policy could provide an immediate boost to sentiment. We also expect Chinese earnings to improve, as companies begin to enjoy a post-Covid recovery and lower commodity prices. 

Pockets of opportunity and higher hopes for 2023 

Southeast Asian commodity producers like Indonesia and Malaysia are stepping in where possible to fill global shortages triggered by the war in Ukraine. Economic reopening has contributed to a strong recovery in the Asean block, which also benefits from manufacturers relocating outside of China. Exporters across the region are benefitting from dollar strength; Japanese firms, for example, will profit from the yen being at its weakest level in more than two decades, despite migration of production overseas in recent years. Finally, areas of Asian technology which had previously been undervalued may start to see fresh opportunity. Asean countries are on track for 2022 growth rates among the highest globally, further reinforcing our brightening view on Asia asset classes as we close out 2022. 

View our latest Quarterly Outlook including a deck showing how we are thinking about China’s recovery and its investment implications.

Download the Q4 2022 Investment Outlook deck here.

View Q4 investment implications at a glance here.

Andrew McCaffery

Andrew McCaffery

Global CIO, Asset Management