Chief Economist’s note: Is Asia opportunity or risk?

It’s not a secret that Asia has generally contained the COVID pandemic far better than the Western World. This advantage might allow it to conduct a more prudent – and thus more sustainable, economic policy. Will that transfer into equity market outperformance?

The last time the Asian market outperformed the US on a sustained basis was during the BRIC hype some 15 years ago. The last decade was not that rosy, especially on the emerging side of the continent where monetary policy wasn’t so expansive. For this exact reason, valuations are often less stretched than on developed markets (and especially the US). Add better valuations, better virus response and generally economic gravity moving towards Asia and you could have a good mix for outperformance.

Having said that, outperformance might not necessarily mean strong rally in a near term. While valuations are lower, the MSCI EM (EIMI.UK symbol) still gained more than 100% from 2020 lows to recent highs. Some signs of fatigue have emerged since then and a deeper correction (like a 26% slide from 2018) could very well be in store on 2 main themes: USD appreciation and rising bond yields, growing tensions between the US and China.  

EIMI stands for MSCI EM core iShares ETF what is heavily tilted towards Asia. While there are many reasons to be optimistic long term, the latest price actions points at a high risk of a deeper correction. Source: XTB