Market Outlook 2017: Asia expected to remain the world's growth engine amid increased global macro uncertainty

HONG KONG, CHINA - Media OutReach - Dec 15, 2016 - Emerging markets in Asia are expected to continue to grow in 2017, offering opportunities for investors amid ongoing global political and market volatility.

Despite considerable political uncertainties in the near term in the US, the UK and Europe, as well as potential changes to US trade policy under the coming Trump administration, modest improvement in global economic momentum is expected to continue in the year ahead.

Strong fundamentals in Asia

The introduction of trade protectionism risks derailing the Trans-Pacific Partnership, which could in turn negatively impact global growth. Investors may also see a gradual rise in inflation, flatter yield curves and a higher federal funds rate in 2017. This may lead to a more cautious stance by the Asian central banks due to market volatility. Nevertheless, with long-term interest rates in advanced economies expected to remain low in the year ahead, growth and strong fundamentals in the Asian market will present opportunities to those investors willing to diversify across asset classes and geographies.

Against this global backdrop, opportunities can be identified in riskier, higher yielding asset classes, including Asian equities, which can offer better returns for investors seeking to manage market volatility.  

Geoff Lewis, Senior Asia Strategist at Manulife Asset Management, said: "Despite the political uncertainty following Brexit and the US Presidential election, we're cautiously optimistic about the year ahead. US fixed investment is expected to pick up and global monetary policy is likely to remain accommodative which will alleviate pressures on the equity markets. There are significant opportunities in Asia for investors. The region hasn't been immune to the challenges facing the global market economy, but it's still, in our opinion, the highest quality emerging market in the world and likely to draw increased interest in 2017."

Asia (ex-Japan) is expected to outpace the US, Europe and other emerging markets such as Latin America, with 6% gross domestic product growth forecast for 2017^[1]. The latest Manulife Investor Sentiment Index (MISI)* also reveals that Asian investor sentiment for investing in Emerging Asia has jumped from 19 in 2015 to 34 in 2016.

2017: A Turning Point for Asian Equities     

2017 looks to be a turning point for Asian equities, which will generate opportunities for investors. While Asian stock earnings were soft in recent years, earnings are expected to be revised up in the coming year as a result of an improved economic environment as well as supportive fiscal and monetary policies.

More broadly, when compared to 2016, capital flows, exchange rates and bond spreads across most of the region are expected to continue to stabilise in 2017, creating a more positive macro environment for equities. Real interest rates in Asia, which constitute the improving inflation outlook, are increasingly more favourable, indicating a lower vulnerability for Asian stocks to future interest rate increases from the US Federal Reserve.

Among the Asian markets, opportunities should become available in Chinese equities, as evident by the improving private investment landscape and the first positive Producer Price Index (PPI) reading in 55 months[2]. North Asian markets, such as China, South Korea and  Taiwan, are also expected to perform better in the early part of 2017 due to the perceived positive impact of fiscal stimuluses and increased economic activities in the US. The uncertainty over forthcoming elections in Europe may result in an increased volatility in global markets and Southeast Asia should therefore perform relatively better given that its economies are driven largely by domestic consumption and policies, as was observed in 2016.

The MISI survey revealed that 80% of investors indicate that the next six months will be a "neutral to good time" to invest in equities. The top three reasons cited by those investors that favour Asian stocks were signs that market conditions are improving (41.5%), a stable market place (38.5%), and low interest and lending rates that drive the asset class (35.8%).

Ronald Chan, Chief Investment Officer of Equities Asia (ex-Japan) at Manulife Asset Management, commented: "We believe 2017 could prove a turning point for Asian equities,  particularly if China's gradual economic rebound presents positive knock-on effects for other regional economies. As the economic outlook brightens, valuations are also expected to improve, which could offer meaningful gains for opportunistic investors. At Manulife, we see constructive opportunities in Indonesia, China and India equities."

Capturing Asia Fixed Income Opportunities amid Downside Risks

Volatility in rate, credit and currency markets should remain in 2017. The outlook for Asian fixed income will also depend on the new Trump administration's trade and fiscal policies, as well as their impact on US and global growth, rates and monetary policies. The pace and magnitude of the Federal Reserve's rate hike will also impact on Asian fixed income. 

Asian economic fundamentals are expected to remain stronger than other emerging markets in the year ahead. Over the past ten years, a rating upgrade trend was seen for most Asian countries, enabling them to achieve investment grade status. Countries in the region also enjoy stable economic growth, stronger balance sheets, and a better macroeconomic position than in previous years. In 2016, credit spreads remained tight and certain local currency markets saw some dramatic sell-offs.  Opportunities may arise in local markets if and when stability in global rates and currency markets is seen, and when corporate bond spreads widen.  The MISI also showed that 84% of investors see the next six months as "a neutral to good time" to invest in the fixed income asset class.

Endre Pedersen, Chief Investment Officer of Fixed Income Asia (ex-Japan) at Manulife Asset Management, said: "Against a backdrop of ongoing market volatility, there is still a role for fixed income investment as part of a diversified portfolio. The fundamentals for Asian fixed income are still there and supportive.  Looking ahead in 2017, if the credit spreads widen and stability of rates and currencies kick in, there will be potential to generate positive returns in some local markets."

For more information on the Manulife Investor Sentiment Index, please visit www.manulife.com

About Manulife Asset Management

Manulife Asset Management is the global asset management arm of Manulife, providing comprehensive asset management solutions for investors. This investment expertise extends across a broad range of public and private asset classes, as well as asset allocation solutions. As at September 30, 2016, assets under management for Manulife Asset Management were approximately C$450 billion (US$343 billion, GBP£263 billion, EUR€305 billion).

Manulife Asset Management's public markets units have investment expertise across a broad range of asset classes including public equity and fixed income, and asset allocation strategies. Offices with full investment capabilities are located in the United States, Canada, the United Kingdom, Japan, Hong Kong, Singapore, Taiwan, Indonesia, Thailand, Vietnam, Malaysia, and the Philippines. In addition, Manulife Asset Management has a joint venture asset management business in China, Manulife TEDA. The public markets units of Manulife Asset Management also provide investment management services to affiliates' retail clients through product offerings of Manulife and John Hancock. John Hancock Asset Management is a division of Manulife Asset Management.

Additional information about Manulife Asset Management may be found at ManulifeAM.com.

*About Manulife Investor Sentiment Index in Asia

Manulife's Investor Sentiment Index in Asia (Manulife ISI) is a half-yearly, proprietary survey measuring and tracking investors' views across eight markets in the region on their attitudes towards key asset classes and issues related to personal financial planning. The Index is calculated as a net score (% of "Very good time" and "Good time" minus % of "Bad time" and "Very bad time") for each asset class. The overall index is calculated as an average of the index figures of asset classes. A positive number means a positive sentiment, zero means a neutral sentiment, and a negative number means negative sentiment.

The Manulife ISI is based on 500 online interviews in Hong Kong, China, Taiwan, Singapore, Malaysia, Thailand and the Philippines, and 500 face-to-face interviews in Indonesia. Respondents are middle class to affluent investors, aged 25 years and above who are the primary decision maker of financial matters in the household and currently have investment products.

The Manulife ISI is a long-established research series in North America. The Manulife ISI has been measuring investor sentiment in Canada for the past 17 years, and extended this to its John Hancock operation in the U.S. in 2011 and Asia in 2013. Asset classes taken into Manulife ISI Asia calculations are stocks/equities, real estate (primary residence and other investment properties), mutual funds/unit trusts, fixed income investment and cash.

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