For the rest of 2022, the financial markets will be on edge as expectations of further tightening of monetary policy globally with no clear visibility of the extent of the increase and the duration in sight. We believe we should be able to infer more on how this tightening stance would lead the global economy to in the next few months. We shall lay out our thoughts on how we see long term inflation.
There were comparisons drawn to Volker’s tightening in the early 1980s. That period of sustained and quick interest rate hikes resulted in both equities and bond market declining significantly. To refresh, the 1980-period was the result of an explosion of demand associated with high spending, typical of mega-stimulus packages after the Covid-19 pandemic in 2020. We are not confident the draconian interest rate hike would do the trick of taming inflation, without causing a sharp contraction in economic demand. This is because the supply of goods and services are not increasing as fast as demand. This is due mainly to not just temporary supply disruptions but also structural factors such as ageing demographics in advanced economies and US/China decoupling.
We are of the view that the global inflation rate will be higher than in the last few decades going forward, after the central bankers of the world are done with their tightening. This also means central bankers around the world would have to accept higher inflation rates in the long term and not look at the 2% inflation rate number as the benchmark number. Government policy makers should also tackle the root of higher inflation by focusing on improving the supply side of things in the economy instead of relying on monetary policy.
China’s recovery from the pandemic has been set back in Q3 2022 by fresh zero-Covid lockdowns, summer power cuts and further property market weakness. China’s growth supportive measures and policies continue to be rolled out: policy rates cuts, real estate sector stabilisation measures & the latest State Council’s infrastructure support. These should support a gradual recovery in 2H22.
Chinese Premier, Li Keqiang has signalled that the economic recovery has started since June, and still in its early feeble stage. To further bolster the recovery, the government announced 19 new additional measures amounting to US$146 billion. It includes funding support that straddles across the economy, with targeted focus on recent drought-hit regions. These measures, together with lending rates reduction would enhance the transmission effect of invigorating the economy, especially in reducing the cost of corporate financing and personal consumer credit.
The beleaguered housing market plagued with news of developer defaults, mortgage boycotts and slumping sales came after the Chinese government’s clampdown of the sector in 2018. While the headlines of its effect on the financial system looks grim and dire, we think that the property market would most likely muddle through amid a bumpy and mild economic recovery.
Typically, demand for property would rise and turn into a boom after the government eases policy to address stress points. Furthermore, urbanization, upgrading demand and rising income would likely set the stage for more fundamental growth over the long run.
On the geopolitical front, we are peering into the long-term future on how the global economic growth should be shaping up. The latest Shanghai Cooperation Forum held in Uzbekistan has seen members of the forum entering into long-term investment deals. There were also plans to sharpen its focus in developing regional trade and investments going forward. Besides the eight member states, there were various observer states in the meeting. We would be watching with keen interest how this would look like in relation to its contribution to global economic growth and our exploration into new investment ideas in the Asian region.
We believe the world is in a phase of a major regime change, whether it be a re-positioning of economic growth or inflation trend in the long term. We are assessing continuously the global developments and their impacts to the financial markets. Currently, the economic and market uncertainty may remain high but investment opportunities are emerging, with inflation rate likely peaking. We shall continue to be nimble and selective in our portfolio stance.