We are in the longest stock market bull run in history, which has endured various volatilities since March 2009. There were periods where the US economy contracted yet the stock markets not only quickly recovered but also went from strength to strength. This is a reminder that economic cycles and market cycles do not move in lock-step. 2021 turned out to be another stellar year for the global markets, with the exception of China and Asia.
The gradual reduction in policy support, the main topical issue, could induce a slower economic recovery pace, where investors wonder if robust corporate earnings will spur equities higher in 2022. Furthermore, dwindling liquidity could threaten and put a lid on more speculative corners of financial markets, including Bitcoin, meme stocks, and even special purpose acquisition companies (SPACS). At this juncture, we believe the recent stock market weakness is reflecting these uncertainties and is swiftly discounting them. Investment sentiment is fragile from tighter monetary policy stance with disastrous scenarios being painted by various market participants.
At the time of writing, the stock market continued to gyrate with more stocks declining than appreciating. To us, this is a general rotation of growth stocks (more expensive) towards value stocks. We are not seeing a systemic selloff from the global economy falling off the cliff. In our opinion, the economy has many things going for it especially with so many new innovations and improvements. The global economic recovery is likely to continue and support corporate earnings growth, albeit coming off from a high level in 2021.
As we all know, the market is not going to move in a straight line. Nonetheless, we believe the speed bump we are seeing now is unlikely to derail the long-term uptrend in the equity market. As such, a globally diversified equity allocation approach still makes sense given the varying stages in the economic cycle in different regions and a wide range of ways in dealing with COVID-19.
China’s property sector shrank at a faster pace in the final three months of 2021 as the country’s housing slump continued to take its toll on the economy. There were fears this could morph into a systemic risk, especially with the offshore debt market essentially shut for fund raising. We beg to differ on this argument. We are seeing prominent Chinese property companies proactively deleveraging of late. Anecdotally, the Chinese authorities have gradually loosened the restrictions on financing activities of property developers and lowering interest rates. In our view, what would follow is probably a consolidation of the property sector with fewer property development companies from a crowded space for such a long time.
Secondly, given China government’s policy on ensuring adequate supply and measures to control COVID-19, inflationary pressure is expected to ease. With this, the environment is conducive for continued monetary policy easing to stabilize its economic growth. The issuance of more government bonds have also helped to speed up infrastructure investments. These are all positive moves in the right direction for the Chinese economy in the near term.
In the long term, the Chinese policymakers place “Common Prosperity” as a key policy motivation for the shifts in regulation and governance framework, which we believe would guide economic growth and investment themes.