Asian stocks and bonds should stand out as fair-haired children even in the context of a Goldilocks investment environment, analysts say.
Whether in terms of earnings growth or relative valuations, markets in the region should offer investors some of the best returns next year if the global economy — as anticipated — continues to steam ahead.
"In our mind, this is the age of Asia," with developed markets and emerging markets in the region alike offering solid potential gains for global investors during the coming year, said Kevin Anderson, Hong Kong-based head of investments, Asia-Pacific, with State Street Global Advisors in a recent interview.
That should prove true even though analysts expect China — the biggest engine of global growth over the past decade or more — to shift into a slightly lower gear in 2018. Many economists predict the growth of China's gross domestic product will slip to less than 6.5% in the coming year from the 6.8% anticipated for 2017.
Getting the question of China's growth right — whether it will be in the 7%, 6% or 5% range in coming years — is the key to getting the global economic outlook right, noted Markus Schomer, PineBridge Investment's New York-based chief economist, at a Nov. 30 briefing in Singapore.
PineBridge's take on what Mr. Schomer called the "most important economic trend (in) the most important economy to pay attention to" is that China's growth will ease to 6.4% in 2018 and 6.2% in 2019.
In light of widespread concerns that the surge in corporate debt powering China's recent growth could ultimately trip up its economy, expectations now that the country's leaders can engineer an orderly slowdown stand as Asia's foremost contribution to the "glass half full" view dominating the economic landscape.
Analysts say they're optimistic that a number of other land mines on the economic horizon can be sidestepped during 2018.
For example, analysts say over the coming three or four years the inevitable reversal by major central banks of the tidal wave of liquidity with which they flooded global markets following the 2008 financial crisis will pose huge risks for global investors. But for the coming year, continued buying of assets by central banks in Europe and Japan will more than offset selling by the U.S. Federal Reserve, pushing the challenges of investing in an environment of monetary tightening out into 2019, noted Erin Browne, UBS Asset Management's New York-based head of asset allocation, investment solutions, in a Dec. 1 briefing in Singapore.
Likewise, the pickup in synchronized global growth lifting investors' spirits now would normally carry the threat of rising inflation, but with major economies at different stages of the business cycle such "overheating" risks are unlikely to materialize in 2018, Morgan Stanley Research predicted in its December report on the global macro outlook.
And China's ability to turn the corner on its growing debt burden could offer important opportunities for global investors looking at the region in 2018, analysts say.
SSGA's Mr. Anderson predicted Chinese policymakers will succeed in reining in credit growth over the coming year without tripping up the fast-growing economy — a conviction he concedes many investors don't share yet.
Investors are mispricing the risks to China's economy from continued deleveraging, leaving market segments such as the country's big banks trading at attractive values, said Mr. Anderson. The coming year will offer investors opportunities to gain long-term strategic exposure to the country, he said.
Meanwhile, the "amazingly strong market for emerging markets" in Asia in 2017 "should continue, albeit not at the same pace as we've seen this year," predicted Belinda Boa, BlackRock Inc.'s Hong Kong-based head of active investments, Asia-Pacific, and chief investment officer of emerging markets, fundamental active equity, in a Nov. 22 briefing in Singapore.
Through 2017, leading market benchmarks have surged, in local currency terms, by roughly 33% in Hong Kong, 27% in India, 22% in South Korea, 20% in Japan and 18% in Singapore. This year's retreat by the U.S. currency against most of its counterparts in the region has made gains in dollar terms even higher.
"We expect Asian equities to continue to do well in 2018, especially relative to developed market equities," although "potential gains may not be as extravagant" as those investors enjoyed in 2017, agreed Ronald Chan, Hong Kong-based chief investment officer, equities, Asia (ex-Japan), with Manulife Asset Management, in that company's outlook report for the coming year.
But even if this year's heady gains prove hard to match, "Asia is still in the midcycle of a cyclical rally and (on) solid footing, supported by structural reforms across various countries," added Mr. Chan.
Even the more skeptical forecasts, such as that of Robeco Asset Management Co.'s "Playing in Extra Time" outlook report, concede valuations — while important on a five- to 10-year timeframe — are "pretty useless for predicting" the near future.
The longer the party goes on, however, the harder the fall to come, the Robeco report said.