The United States is looking at a steady but "simply less exceptional" growth rate, Citi Private Bank investment strategists said in a mid-year review yesterday. And with a moderating US dollar, emerging Asian markets, which are showing signs of resilience, are expected to get a boost.
Global chief investment strategist Steven Wieting said: "When the US is not growing exceptionally strongly, what often happens is that the US dollar moderates."
Asia-Pacific investment strategist Ken Peng added that the US dollar is expected to cool for three to five years, which could turn into a tailwind for Asian emerging markets.
Citi Research predicts that the world's real gross domestic product will grow by 3 per cent both this year and next year, which should translate into 10 per cent trade growth. "Trade is rising broadly in Asia," said Mr Peng.
And, earlier this year, Citi analysts upgraded emerging market equities in Asia to overweight.
Mr Wieting said that emerging markets' foreign reserves, which have risen alongside external debt, "suggest, to me, world economies that can absorb Fed tightening".
Global investors are still relatively underpositioned in Asia, said Mr Peng, who identified India as a particularly favourable market when looking at the next 12 to 18 months, as its policy reforms are "on such scales not (seen) in China, not anywhere in the world".
While next month's introduction of goods and services tax is causing volatility, he noted that the move could encourage inter-state commerce by unifying the tax system. "The India story has probably more than a decade to play out. It's not something that will end right away, so I'm not too worried about the consensus on its overweight position."
China comes in second for regional prospects, said Mr Peng, adding that concerns over Chinese debt may have been overstated.
"If you want to look at the debt, you also have to look at the assets, and I think they are fairly well matched," he said, adding that the level of debt is comparable with developed markets and consistent with China's savings rate.
The question should instead be whether the Chinese financial system can support industrial sectors with room to grow, such as e-commerce, he said.
As for Indonesia, Mr Peng said that its "strong reform drive" compares well with India and there is also potential for productivity gains and urbanisation, which were important drivers in Chinese growth.
"However, they're facing some significant political risks ahead of the 2019 election, so the near term looks a bit challenging."
Mr Wieting said it is time to shift away from US assets. "The kinds of returns that we see in public markets, particularly developed markets, are significantly lower," he said, pointing to a "significant" decline in developed-market bond yields.