The direction of global markets will likely depend on where we are headed economically after expectations of interest rate peaking has been ascertained. The US economy is coming off the boil, although the path to a soft landing remains a narrow one. Portions of the US yield curve remain inverted, which for some is a sign that the threat of recession is elevated. High bond volatility also points to great uncertainty.
As we head into the second half of 2022, the path of inflation remains a key source of uncertainty for markets. With the US inflation rate still at a high level, comparisons were being made to that of the late 1970s to early 1980s, when the reading stayed stubbornly high. At that time, the psychology was that American consumers borrowed and spent wages immediately to buy goods so as to get ahead of inflation. We are of the view that the situation now is different. This is based on the fact that consumers do not appear to be borrowing heavily or have huge pay increases that are higher than the current inflation.
With the views of runaway inflation being unlikely, banking sector balance sheet remaining healthy and a less sizeable asset bubble, we believe that the current bear market is less likely to show declines as deep as those of the 2008 crisis. We believe the US market would be less volatile going forward as it looks for clues of inflation peaking in the medium term.
Since the middle of March, China has had a slew of policy announcements to support the economy and markets, which seem to have taken hold since June. This is a step ahead of the world as it attempts to be the only major country shoring up the global economy. The shortening of the quarantine period for inbound travellers is also a good start to the eventual reopening of the Chinese borders.
In contrast to US/Europe, the Chinese economy is regaining momentum following the disruptions caused by COVID-19. Despite this and given the still-fragile outlook, we maintain our view that there is room for further monetary policy easing, including a cut to the banks’ reserve requirement ratio in 2H22. We do see legs to the gradual recovery in the Chinese economy from this point on, though the path remains bumpy.
We continue to see an optimistic future despite the various issues we experience currently. In the longer term, structural themes like 5G, Electric Vehicle, Artificial Intelligence, Big Data, Cybersecurity and global digital economy remain intact.