The uncertainties thrown up from slowing global growth and high inflation around the world has caused financial markets to be volatile. These worries are difficult to quell, especially with the ongoing war in Ukraine, high inflation affecting most countries and Covid-19’s spread in China.
Global bond yields rose in tandem as hawkish talk from the Fed and ECB pushed up central bank tightening pricing to new highs. More G10 central banks are showing bias to hike rates to neutral rapidly. This also means we should expect the market to swing up and down for a while more.
It is good to assess the financial markets and have a sense of where we are now and where we are heading. Presently, the financial markets are acting ahead of what the central banks would be doing in the medium termin terms of monetary policy tightening to combat inflation. There are concerns that the over-tightening would cause a recession.
Significant bearishness has been baked into the financial markets, measured by the AAII Investor Sentiment Survey, and they are at bearish territory in the last few weeks. Additionally, after the recent global equity market decline, the valuation of various markets are now fairly priced to cheap, from our point of view.
The US corporate earnings continue to be robust, but we will be looking for signals in companies’ earnings reports and economic releases on how companies are coping with rising costs and whether revenue growth will be sufficiently strong to overcome tightening profit margins. So far, based on the latest US inflation figure, we are seeing signs of it peaking as tighter monetary policy settings rein in demand. However, this is an extremely fluid indicator and we will have to watch for further indicators to reassess the financial markets and economy.
On the other hand, we believe the Chinese equity market has reached a strong base level and an inflection point, with long-term investment value emerging. We continue to expect stepping up of policy response going into 2Q22. To stabilize growth, policymakers may prioritize credit expansion over rate reduction and focus on fiscal measures, which will take time to make an impact. Recent key policy responses include relaxation of real estate financing policy. We are also seeing policymakers easing on regulatory measures taken to address structural problems in the economy. Vice Premier Liu He has instructed agencies to be more careful about how far they go in imposing regulations on the technology sector. The authorities are also likely to re-calibrate their approach to pandemic management so that lockdowns and restrictions are more flexible and selective.
More importantly, President Xi reiterates strengthening the infrastructure investment and to build up a modern infrastructure system. The State Council has also decided to strengthen the policy of stabilizing jobs and promoting employment to maintain stable employment and a stable economy. Anecdotally, in Guangdong province, the local government has released new measures to boost private consumption, with automobiles and home appliances as the key items.
Other points to note, the post-pandemic reopening of economies, high savings rates, pent-up demand and strong labour markets continue to be positive tailwinds that remain supportive of the economy and stocks.
In the long-term, the developed and developing world appears to be moving in opposite directions in economic ties. We have built this assumption into our investment strategy so as to navigate through the intricacies of this eventuality. We are taking a more optimistic and constructive approach as we continue to see the Regional Comprehensive Economic Partnership (RCEP) being ratified and in effect. Furthermore, the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) has already been in effect since 2018, and more countries are expressing interest in joining. This will improve trade activity among these members while the decoupling of activities happened between US and China. These partnerships involve various countries in Asia.
In summary, although global earnings growth are likely to slow in 2022 from an elevated pace, the level of absolute earnings could continue to trend higher in response to the ongoing economic expansion and revenue growth, which contributes a large share of overall earnings growth. The impulse of global growth is likely to shift from developed economies to Asia and selective emerging markets. Rising vaccination rates across Asia could allow for a more sustained domestic recovery as governments adapt their strategies to live with global public health crisis and further open up their economies and borders.