Risks to global economic growth remained a top concern as central banks continued to signal tighter policy ahead. At its July meeting, the European Central Bank (ECB) raised its key deposit rate by a larger-than-expected 50 basis points, ending an era of negative interest rates and forward guidance as a policy tool. Furthermore, the US Treasury yield curve sees inversion, indicating a potential economic recession. There is still room for central banks to raise interest rates significantly in 2H22F. The Fed has warned a period of slower growth and a weaker job market would be needed to bring down high inflation.
On the policy front, Joe Biden signed into law The Chips and Science Act, stipulating that US$52 billion will be used to subsidise semiconductor manufacturing in the US and a further amount of US$170 billion will be set aside to fund research and development. At the same time, the US Congress approved a US$700 billion climate, health and tax bill, termed the Inflation Reduction Act. This would result in an increase in wind and solar capacity in the US, and would drive profound structural changes to the global economy, and increases the likelihood of a productivity surge in the medium or long term.
Corporate and household balance sheets are in relatively good shape in the US. Global supply chain pressures are also gradually diminishing. In our opinion, these are positive factors that we believe would cushion the effects of the tightening stance adopted by the central banks. We shall continue to monitor the global economy with an eager eye.
We believe that China will likely avoid an outright recession and adverse downside in its financial system. At the most recent July Politburo meeting, incremental easing came in the form of the government signalling the normalization of the regulatory environment for the internet/ platform industry and reiterating support for infrastructure spending.
According to reports, the Chinese government has announced several initiatives to shore up the real estate sector, one of the key factors for its economic growth for several years. The government has started to provide liquidity to developers to clear stalled developments and the banks may provide loans to developers as an ad-hoc policy to solve their short-term liquidity situations.
Geopolitical risks took centre stage recently as investors braced for fallout from US House of Representatives Speaker Nancy Pelosi’s visit to Taiwan. China’s early response appeared to be more measured than was initially feared. In the long term, we believe we have to live with the two biggest economies, US and China, decoupling from each other at various levels. Following that, it might not be inconceivable to think that deglobalization will happen.
With the financial markets’ decline thus far, we are getting more constructive in looking for great stock ideas. At this juncture, economic and market uncertainty remains high but investment opportunities are emerging, making it imperative to stay diversified, retain optionality and be nimble and selective.