Market Outlook - November 2021

The tug of war between growth and inflation would intensify in the coming months.  In view of that, market participants are expecting the tapering in bond buying may move at a faster pace over the next few months.  Inflationary pressure in the US are set to remain persistent at least until 1H 2022, due to the confluence of the following factors; supply chain bottlenecks, labour/material shortages,  elevated housing, wage hike concerns and high commodity prices.  However, in the minutes of the Fed’s latest meeting, the policymakers continued to describe the surge as “transitory”.

Major central banks, which had for months maintained that the spike in inflation was transitory, are facing a similar dilemma.  If they tighten monetary policy too soon, they risk short-circuiting the economic recovery, plus transmitting shocks to emerging economies.

Many have grown worried that the global economy is heading towards another stagflationary regime (low growth, high inflation), similar to the one in 1970s.  To us, the global economy is in a far different situation today than it was back then.  Most notably, the supply challenges of today are not permanent and should fade in time, and central banks’ ability to contain runaway inflation has also greatly improved since then.  We shall be monitoring policymakers’ moves in the coming months to gauge the economic growth trajectory.

In China, a series of policy upheavals in the past one year with the goal of common prosperity has pushed up the risk premium in the Chinese capital markets.  China’s deeper ambitions for more sustainable development and inclusive growth do not derail the country’s long term prospects.  Looking back the country’s staggering growth has been uneven, deepening income inequality especially between urban and rural areas.  To boost its economy further, all segments especially lower-income households and less developed cities have to grow together.  Essentially its policy is shifting from speed of growth to quality and sustainability of growth, from efficiency to equality, and from mega corporates to innovative enterprises.

Despite short-term volatility, China’s long-term outlook is still favourable.  We have been positioning into leading companies that possess solid growth prospects, so as to capture attractive structural opportunities.  In the short term, the Peoples Bank of China reiterated a prudent but flexible and targeted monetary policy so as to maintain reasonably abundant liquidity condition, giving us comfort that some form of support is given.

Looking ahead, we expect the markets to continue to oscillate sideways in the near term to digest multiple uncertainties, including soaring commodity prices, higher US yields, and lingering policy uncertainties.  We are optimistic given the re-opening of the world borders as more economic activities would improve from there.  In the long term, we will be looking at governments’ policy moves to ascertain how the global economic pace would be like.