Market Outlook - March 2023

As more economic data is released, we believe that the severity of the recession in the US could be deeper than previously expected. For example, retail sales on a nominal basis in the US are said to be robust by media coverage, however it is worth mentioning that real retail sales have been stagnant since mid-2021. This implies that growing retail sales is a result of price inflation, rather than strong consumer demand. In addition, household savings as a percentage of disposable income and money supply growth in the US are currently at similar or lower levels than in 2008.

Notable developments have occurred at the time of writing, starting with the collapse of a few regional banks in the US and significant concerns on Credit Suisse’s financial standing. We believe the collapse of the regional banks was largely due to the aggressive rate hikes by the Fed, leading to worsening capital positions. We are monitoring the situation closely as this is a classic case of a bank run, which could pose a serious threat to the global financial system.

Our take is that the situation should be under control as the Federal Deposit Insurance Corporation in the US have announced that they will insure all customer deposits for Silicon Valley Bank in a bid to prevent further panic. Additional funding was also made available by the Fed via the creation of a new Bank Term Funding Program, which we believe will prevent any further liquidity crunches. For Credit Suisse, the risk has also been contained, in our view, as they will be acquired by UBS, with additional funding provided by the Swiss National Bank to UBS as part of the deal.

Towards the end of the February, China released a 12-point proposal regarding the Ukraine crisis. The initial response from both Russia and Ukraine has been positive as their leaders are planning to have further discussions with China. This is another development that we are watching closely as it could free up the last major supply constraint globally. We expect commodity prices to normalise further if China is successful in brokering a peace deal between the two countries. This could also improve China’s credibility greatly, leading to better standing in the global political scene. We have already seen China’s reliability in foreign relations after they successfully brokered a reconciliation between Saudi Arabia and Iran. These events may be crucial for China in an increasingly divided world between the US and China.

China’s GDP growth target from their two sessions was 5.0% year-on-year. This is considered a modest target compared to historical targets, signalling economic challenges for the global manufacturing hub. Despite this, the long-term outlook for Asia still outshines that of Western countries from a relative standpoint. Over the near-term, we will continue to monitor the major issues highlighted to ensure that we are safely positioned in case of a systemic risk.

Market Outlook - February 2023

Coming into 2023, analysts remain divided in terms of where the global economy is headed. Many agree that a recession in major developed countries is looming, but the severity and spillover effects to the global economy has been largely debated. We believe this disparity can be attributed to conflicting economic data, such as declining consumer demand clashing with a robust labour market. This has led to a precarious situation where it is uncertain if the US Federal Reserve (“Fed”) has already overtightened their monetary policy.

With our current read on the market, our base case is still a recession in developed countries, but we do not think that a severe recession is in store and could see economic data bottoming out before the end of 2023. There have been concerns on China’s reopening causing an inflation spike, however we believe that with the removal of zero-COVID policies, supply chains should ease and balance out with demand.

Towards the end of the month, tensions between the US and China rose again due to the discovery of a Chinese surveillance balloon over the US’ military zones. This caused relations to sour as US diplomat, Antony Blinken, has postponed his visit to China indefinitely. We expect the current status quo of heightened geopolitical risk to continue and cause increased uncertainty in financial markets.

Over in China, clear indication of regulatory easing was seen in their technology industry, where a total of 88 new video games were approved in January, after 128 games were approved in December. Ant Group’s consumer finance unit also received approval from regulators to increase their registered capital by more than double, a relief for the company that has been under regulatory scrutiny since its initial public offering was abruptly halted in 2020.

General market expectations seem to be pricing in a mild recession, with markets expecting possible interest rate cuts before the end of this year. This is despite the Fed continuing to message that they will maintain their hawkish stance as long as inflation stays high. This mismatch between the Fed’s hawkish stance and the market’s dovish expectations on interest rates could be a potential risk for developed markets in the near-term, in our view. On the back of this uncertainty, we stick with our thesis to remain more constructive on Asia due to the expected recovery from China’s reopening.

Market Outlook - January 2023

The outlook for 2023 continues to favour Asia when compared to developed countries. The International Monetary Fund has forecasted China’s gross domestic product (“GDP”) to grow by 4.4% year-on-year versus the US’ forecasted growth of 1.0% year-on-year. This would be a significant improvement for China as their GDP growth for 2022 was only 3.0% year-on-year.

The most prominent event for December was when China decided to remove most preventive measures for international travel, after three years of Covid restrictions. We view this as a positive for the Asia region as the reopening came much sooner than most analysts expected. Although there are short-term labour issues due to a spike in Covid cases, we believe the faster reopening will result in quicker earnings recoveries across most sectors in China.

China’s leadership has also publicly announced their determination to support the economy for 2023. Key issues to highlight include further support to the property sector, easing regulatory environment for the technology sector and increased transparency for listed state-owned enterprises. We remain positive on China on the back of these encouraging actions.

Surrounding Asian countries will also benefit from the reopening as consumer and commercial spending improves in the region. We expect to gradually see a shift from goods spending to services, as we saw in developed countries when they first reopened their economies.

With regards to the semiconductor controls against China, Japan and the Netherlands have indicated that they will adopt some US measures to join the export ban on China. We expect the fierce competition for semiconductor leadership between developed countries to continue for the foreseeable future. Despite the massive inflows of investments, this is negative for the semiconductor sector, in our view, as uncertainty in execution and inefficiencies will arise from these countries attempting to build their own supply chain.

In the US and Europe, our outlook remains negative for the first half of 2023 as they are still tightening their monetary policy. Despite inflation cooling slightly in the US, their robust job market could cause inflation to stay elevated. This leads us to believe that higher interest rates and lower economic activity could linger for a while more before a recovery is in sight.

Our thesis between developed markets and Asia is unchanged, we still expect risk assets in the developed markets to bottom out and stage a broad recovery as we make our way past peak Fed hawkishness and inflation decelerates more markedly in later part of 2023.

We adopt more positive views on the Asian markets, especially Chinese securities. We are hopeful that Asia will enjoy an accelerated recovery from China’s reopening as spending and investment in the region picks-up.

Market Outlook - December 2022

With recessionary conditions likely to emerge across much of the developed world in 2023, this looks to be a decent outcome for Asia in the near to medium term as investors seek for higher returns as its equity premium appears to be relatively more attractive.

The US and European economies would continue to weaken at least to the first half of 2023 given the recent economic readings we have seen. At the same time, these economies are still muddling through a tightening monetary policy regime with high inflation still to be effectively tamed. We are unsure how the economic damage would be like after this tightening phase.

The outcome of the US midterm elections is now conclusive, following the Republicans taking control of the House of Representatives, albeit by a smaller-than-expected margin. This could result in some headwinds to fiscal spending.

On the other hand, we are optimistic on the Asian markets and economies as we believe a market bottom has been formed. China’s October activity data indicated slowing economic growth and greater slack in the job market. However, these are backward-looking, and financial markets are likely to look through the soft near-term data given recent positive policy signals on zero-COVID and the property sector.

Despite near-term challenges, our base case is that China will exit its dynamic zero-COVID regime next year, as authorities lay the groundwork on areas like vaccination. We have seen follow-up measures after local media reporting of 16 measures from regulators which aims to solve property market issues. These measures include the People’s Bank of China (“PBOC”) and the China Banking and Insurance Regulatory Commission asking commercial banks to loosen presales escrow account for developers, which can withdraw more cash from the accounts if they meet some criteria. We expect to see more follow up measures in the near future. The PBOC has also announced a reserve requirement ratio cut, a policy signal that monetary policy will remain supportive to stabilise growth.

On the geopolitical front, the US-China relations should remain contentious. While a full economic decoupling is not realistic, the US will be pursuing industrial policies that would curb exports to China on areas like artificial intelligence, quantum computing and biotech.

The investment environment in 2023 for the developed markets is likely to remain highly uncertain given the lagged impact of rate hikes, sticky inflation and unfavourable earnings outlook. We believe the worst for developed markets in terms of growth and earnings are ahead, and risk asset valuations currently have not deteriorated sufficiently to reflect this.

Market inflection points historically take place before the end of recessions. Looking ahead, we expect risk assets in the developed markets to bottom out and stage a broad recovery as we make our way past peak Fed hawkishness and inflation decelerates more markedly in later part of 2023.

We adopt more positive views on the Asian markets, especially Chinese securities. We are hopeful that the Asian equities should stage a meaningful recovery from now on since its recent bottom in October.

Market Outlook - November 2022

2022 has witnessed significant market upheavals, with investors having to grapple with inflationary pressures, tightening financial conditions and geopolitical concerns. We shall zoom in to look closely at the Chinese economy as the Chinese equities markets had a major decline in the month of October.

After the recent sharp sell-off in China, we believe the markets are likely reflecting excessive pessimism. Credit growth posted a broad-based slowdown in October, likely reflecting weak demand, including lingering weakness in the housing market, and the Chinese government persistence stance on their zero-Covid policy.

From our perspective, China does not have an inflation problem. Bumpy growth and low inflation mean the central bank has the runway to continue easing policy, including tolerating a weaker trade-weighted CNY to support China’s export competitiveness and to boost domestic demand.

We continue to be optimistic on the Chinese financial markets with the views that the economy is at the tail-end of the economic downcycle and would be on a steady road to recovery for the following reasons:

Firstly, we are encouraged to see the Covid policy recalibration as it means more flexibility in handling outbreaks and less disruption to the economy. Actual implementation remains to be seen, given current severe situations in multiple cities like Guangzhou. In our view, the implementation of this policy is a move in the right direction towards improving economic activity.

Secondly, the People’s Bank of China (“PBOC”) and China Banking and Insurance Regulatory Commission (“CBIRC”) jointly announced a slew of measures to provide financial support to private corporates in an attempt to revive the property market. It includes 16 measures which aim to ease developers’ liquidity pressure by 1) supporting their refinancing, 2) allowing them to delay debt repayment, and 3) encouraging financial institutions (mainly banks) to lend more to developers. This is a big improvement compared to last few months piecemeal steps. We believe this should bring a halt to the property downward slide in the near term and alleviate a potential systemic pressure on the Chinese economy. In the meantime, we will monitor the homebuyer sentiment for any notable pickup in the real estate market. This takes time and the moment there are green shoots appearing, it should help in the improvement in the Chinese financial market.

Lastly, a highly unified government could lead to more effective policy execution and co-ordination in the midst of sluggish growth. President Xi Jinping secured his position as the leader of China in the 20th Party Congress, and have also appeared to keep his close allies firmly in place in the Politburo. In our opinion, this allows the current leadership to push forward economic policies strongly and more confidently.

On the other hand, we see the US economy and financial markets on a weakening trend in the medium term. The US Federal Reserve continues to be on a relentless trend in raising interest rate to tame inflation. It has delivered four consecutive increases of 0.75% this year with no sign of abating in the near term. The silver lining came from the latest collection of anecdotes from the Beige Book. It noted that inflation has eased somewhat and is expected to continue to ease further, an indication that the Federal Reserve aggressive monetary policy tightening may have started to take effect. However, this comes at the cost of slowing economic growth. 3Q earnings reporting season is currently underway with a fairly mixed set of corporate results. While consumption appears broadly resilient, especially in travel, pockets of cracks are appearing in the sales of goods. Results from mega-cap tech names have thus far been disappointing on the back of elevated expenses, currency headwinds, and cyclical advertising weakness.

In the US midterm elections, third party data suggest that a divided government is the most likely outcome. Consequences of a divided US Congress will mean a paralysis of domestic policies in the next two years, and we should not expect supportive policies to cushion the headwinds from tight monetary policy.

Meanwhile, the largest nations in the Group of Twenty (“G20”) were at odds with each other in the last several years. The G20 summit held in Jakarta recently, offered some hope that there is possibility of a thawing in relationships, especially between the US and China. We shall stay tune to future global developments.

In summary, we believe there is a decoupling in the global economy with the Asian economies at the tail-end of its decline with recovery in sight, and the developed economies still on the path of economic decline in the medium term. We continue to position ourselves with emphasis on the Asian economies and keeping an eye on the developments in the developed world.

Market Outlook - October 2022

The world economy is showing signs of a rapid downtrend as it contends with tightening monetary policy and thus the likelihood of another global recession and the risk of major financial disruptions.  The US Federal Reserve (“the Fed”) will continue tightening monetary conditions, creating challenges for Asian economies, asset prices and currencies in the near term, but the turning point could be approaching when the Fed’s tightening reaches its peak, after which the pressures on emerging economies in Asia should ease.

There are signs that US activities are slowing in response to the tight money conditions.  Average hourly earnings are decelerating and job openings have started to decline.  Companies like Micron, Nike and Federal Express started having issues of higher-than-normal inventories, slowing demand and price discounting.

We should expect asset valuations to adjust into a new era of higher interest rates and tighter money and it is happening now.  We shall watch the corporate earnings in the next two quarters for clues from the year-long policy tightening stance so far.  We believe the economic damage from higher rates plus a stronger US Dollar could bring earnings down from current expectations.  Forecasts have already dropped across sectors, and further downgrades could be on the way.  We are of the view that if there were to be a recession in US, it should not cause a systemic risk like the one in 2008, as the banking system remains strong.

On the UK front, the government has pledged unlimited purchases of long-dated UK government bonds.  We believe this should at least put to rest the risk of a contagion in the financial markets for the time being.  However, this would add to the global economic weakness in the near term.

On the political front, the Russian-Ukraine conflict continues to deepen, with President Putin declaring that Russia will mobilise additional reservists, annexed the Russian-occupied Ukraine region and reiterated that Russia will use “all weapons systems” available to defend its territories.  The situation remains fluid, and we are unsure how this event will pan out eventually.  Our best guess is that going into the winter season, the Europeans may like to see an end to this war event by deciding to strike a deal with Russia of some sort, as they were the main collateral damage economically from this conflict.

In a widening US-Sino technology war, the US broadened its current export curbs to include advanced chips and chip-making equipment produced by US companies.  China, for its part, is intensifying efforts to expand the capabilities of its semiconductor sector.  This will just raise tensions for these two largest economies of the world.

China kicks off its 20th National Congress in October while the US will be holding its midterm elections in November.  At a time when US-China relations continue to tread water, these political events will be scrutinized for any hint on the future trajectory of bilateral ties. The heightened geopolitical tension points to a world where both the US and China will aim to be less reliant on each other in terms of trade and technology.

In summary, the global markets appear to be clouded with lots of risk, but as the market trended lower, we see more investment opportunities emerging, especially with tentative signs of inflation pressure easing.  We are also seeing governments in some parts of the world being proactive in shoring up the economy or markets at any sign of stress.  It goes a long way in allaying our fears that a messy decline like the one in 2008 would take place.  We have positioned our portfolio in companies that are well placed to take advantage of an environment when inflationary pressure is easing and monetary policy would likely have peaked, and also to enjoy the eventual recovery when the headwinds progressively subside.

Market Outlook - September 2022

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.

Market Outlook - August 2022

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. 

Market Outlook - July 2022

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.

Market Outlook - June 2022

It has been a while since the US Dow Jones Industrial Average have fallen for such a prolonged period, notching its eighth straight weekly loss. The decline was on growing fears about the health of the global economy, especially those in the US and Europe, after years of money printing. We have to stretch all the way back to 1932 to find that sort of consecutive weekly losses. That period coincided with the Great Depression period.

In our opinion, the decline in the US stock market is based on fears of a recession from the hawkish stance taken by the US Federal Reserve on the high inflationary readings so far. We do not think that it would amount to a deep recession like the 1930s. During the 1930s, we had a banking system that was breaking down which went on to cause a sharp economic contraction. This time around, US regulators have been very stringent in preventing excesses by taking commercial banks under their wing and imposing stricter capital and liquidity requirements. However, we believe there is a possibility of a recession in the US given that the tighter monetary policy will have the effect of some form of demand destruction. Furthermore, prices of energy and food commodities such as wheat, palm oil, and dairy remain elevated, due in part to supply disruptions from the Russia-Ukraine war; this is pressuring central banks globally to stay focused on inflation even as growth slows.

The European banking system has so far been manageable with non-performing loans having fallen further. However, deterioration in asset quality related to the withdrawal of relief measures and new pressure emerging from the war could lead to a rise in defaults. We shall continue to monitor these vulnerabilities in the medium term.

In China, after the State Council issued a slew of policies to stabilise economic growth, it immediately required all relevant departments to issue details of the policies before the end of May, and asked governments to speed up the implementation. A team will be sent to inspect and to ensure the policies were effected. These moves demonstrate to us the determination of the Chinese government in their efforts to stabilise and stimulate the economy. A strong fiscal and monetary policy response remains necessary to bring the Chinese economy back to recovery.

China’s official manufacturing and non-manufacturing Purchasing Manager’s indices remained in contraction in May amid prolonged pandemic lockdowns in Shanghai but the stronger-than-expected rebound from April suggests that China can recover quickly as lockdowns are being lifted. We expect to see further recovery in the coming months. With the country’s economic situation at a point so dire, things are starting to look up for the market. We are seeing a lot more quality companies with cheap valuations. If policies deliver as we expect, that could mean we have probably seen the bottom of the Chinese market in the last quarter. We are encouraged and optimistic as the growth companies are trading at much cheaper valuations than their global peers in the developed markets. Based on the valuation of Hong Kong and Chinese equities, it appears undemanding and we see long-term investment value emerging over a 12-month investment horizon.

Market Outlook - May 2022

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.

Market Outlook - April 2022

The month of March marked continued concerns about the hawkish stance adopted by the Fed in tightening its monetary policy as the bond market bore the full brunt of it. The global equity market was more hesitant in this respect as shown in the volatility of its performances. We shall first take a deeper look at what this means in terms of the monetary policy tightening and its effects on the financial markets. 

The Fed has confirmed that they would begin reducing the central bank balance sheet by US$95 billion a month, likely beginning in May. In addition, the pace of interest rate hike path will be more aggressive. We believe the financial market is looking nervously at how the monetary policy would move expeditiously towards a neutral stance. The neutral level is a theoretical position where it neither speeds up nor slow down economic activity. The key will be the impact on the job market and broad economy as rates jump higher and growth slows. It’s a signal that the economy is headed for an economic slowdown or a possible recession, though the inverted yield curve does not predict exactly when it will happen, and history shows it could be more than a year away or longer. So far, the bond market has been suggesting that a sharp economic slowdown would eventuate from this hawkish Fed guidance, as demand destruction becomes a real risk. It is difficult to forecast this possibility at this stage as the other counter-balancing forces in the form of border reopening, higher economic activity, and better corporate earnings have so far been favourable. Of the 89 companies in the S&P 500 that have reported first-quarter results, 78% have beaten earnings estimates, according to Bloomberg Intelligence. 

In our view, global inflation shall remain high given that the global economy is chugging along with the exception of China, deglobalization is taking place and the supply chain bottlenecks have not been eradicated. This does not mean the global economy would not grow strongly. We remain confident, in particular, of a surge in technological adoption, with sizeable impact. The resurgence of inflation, which is eating into profit margins of companies, is also likely to spur more restructuring and labour-saving equipment that can help in productivity growth. 

In the short-term, authorities in China again signalled they intend to loosen monetary policy to alleviate the impact of an escalating Covid-19 outbreak and slumping property market. It is also an acknowledgement that domestic and global risks are now bigger than previously expected. There were also signs that top financial leaders have talked about easing regulatory crackdowns, a good development. We expect fiscal policy to do the heavy lifting. So far, corporate income tax for small firms will be lowered to just 5%, while the government spending is set to be higher compared with last year. 

Although Shenzhen and Shanghai have seen lockdowns, there are signs the Chinese government is altering its way of controlling the pandemic while allowing some form of economic activity to continue. In any case, from past resurgence of infections in various countries, this negative impact would prove to be short-lived and limited. 

In the long-term, as the major countries’ interest are at odds with each other, the global trade growth would be lower as more points of friction would emerge and the world is more unsettled. Countries around the world would likely resort to inward-looking policies to promote domestic production over imports. This is to increase the level of safety and security at every level of the country for self-sufficiency.

Market Outlook - March 2022

The evolution of the Russia – Ukraine conflict remains uncertain. At this stage the clearest economic impact on developed markets is via food and energy prices.  Oil, gas, grain and base metals’ supply are prone to disruption from the conflict.  The imminent shortages of these soft and hard commodities stem not only from the war and its direct impact on production, infrastructure, and trade and transit routes, but also in the form of economic sanctions by governments and the voluntary actions of companies.

There are also concerns that newly-imposed sanctions on Russian banks could hurt the European economy.  Some Russian banks now have limited access to the Swift payment system, designed to facilitate international transfer of money.  That means some European banks or other businesses might not get paid in full, or on time, by Russian banks.  Western countries’ sanctions on Russian oil remain a possibility, which would reduce the global supply, lift the price and cause even higher inflation.

We shall take a nuance look at the commodity supply chain (especially on energy) and economic sanctions and its impact on the global economic growth.  At the moment oil supply continues to be free from sanctions and gas supply from Russia to Europe continues to flow.  On the other hand, supply of oil from major producing countries of the world are in some instances sold at a discount to the prevailing spot price in the market to Asian consumers.  It is reasonable to expect that Russian exports would be diverted to Asia in the short term.  In the meantime, grain and base metals supply would be curtailed as both Ukraine and Russia are major producers in the world, as supply chains are disrupted.  We are of the view that once the conflict subsides and there is semblance of truce, the prices of these commodities should decline sharply.

On the issue of limited access to the Swift payment system, there are alternative payment systems in the world or Russia could choose to settle their payments through other currencies besides the US dollar.  This would be inefficient in the short term, especially for the trading parties, predominantly the European countries and Russia.  Anecdotally, there are also assets owned by Russian individuals, seized and frozen by governments.  There are long term ramifications in capital flows resulting from these government actions as private ownership rights, a significant hallmark of capitalism economy, have been infringed. Individuals seeking safety for their assets would have to rethink where to park their funds in safety.

In the face of rising inflation, central banks have started to normalize policies in spite of the uncertainty that renewed war-related global disruptions posed for growth.  The Federal Reserve has shifted its focus away from stimulating economic recovery and toward managing prices.  A flattening yield curve in US has heightened fears of recession.  In the euro area, the ECB announced faster tapering and moving to a regime of policy being set meeting-by-meeting.  In China, despite being the world's largest consumer of food, we think upward pressure on inflation will be broadly contained given high self-sufficiency ratios, and small exposure to Ukraine and Russia.

We are still assessing the inflationary picture globally.  In the medium term, global growth remains above trend and various economies are lifting COVID-19 restrictions. Russia remains a relatively small player in the global economic landscape, and the combination of geopolitical unrest and mounting sanctions appears unlikely at this point to derail the current positive trajectory of global growth materially.  Global supply chain pressures are also beginning to ease for most goods.

On the whole, the way we see the world economy, is one where the Asian economies should not be as adversely impacted as compared to US and Europe.

Market Outlook - February 2022

As we enter the next phase of the market cycles, the key factor for us to consider is a tighter monetary policy regime.  We have started to see stocks, especially early-stage technology and new economy companies with no earnings but promises strong growth prospects, falling sharply versus the rest of the market.

There are four scenarios we envisage in how we think about inflation and economic growth in 2022.  We would talk about only two scenarios at the extremes.  The first scenario would be that high inflation is transitory, and should decline shortly, accompanied with reasonably strong growth.  This is a path that the Federal Reserve is attempting to steer towards, and would lead to both bonds and equities to perform well.  The second scenario would be inflation staying elevated while growth slows significantly.  This scenario would lead to both bonds and equities to face challenging prospects.  These two extreme outcomes being debated extensively are the reasons why we are experiencing highly volatile movements in the financial markets to-date.

From our analysis, the base case we envisage is that US policy rates would increase to just around 1.25%-1.50% this year, slightly lower than the US 12-month treasury bills currently.  We believe this level of interest rates should not derail the economic growth materially.

The situation is complicated further with an escalation of the Ukraine-Russia crisis with the possibility of commodity price shock, causing inflation to stay stubbornly high, a tail risk we will monitor.  If history were to be of any guide, our view is that military confrontations are usually short-lived and a positive outcome would emerge quite quickly.

With such fluid outcomes that could swing from pessimism to optimism within days, we have taken a portfolio stance that should withstand certain levels of volatility from both rising interest rates and geopolitical shocks, while remaining meaningfully invested to capture returns in the meantime.  Plainly speaking, we will be more vigorous in risk management and diversification in managing the portfolio.

On the Chinese economic slowdown and property sector issue, we believe the government are in a strong position to absorb the pressure and recover from them.  On top of the monetary policy easing from lower lending rates and reserve requirements ratio reduction, the Chinese government is considering lifting some restrictions on developers’ access to cash tied up in escrow accounts, a significant step to ease the property sector’s liquidity crunch.  Furthermore, Chinese state-backed funds stepped in to shore up and bargain hunt in the stock market during the month.  Foreign investors are investing into Chinese financial markets, believing it is a destination away from inflation and pandemic problems with better growth in the medium term.

The Chinese renminbi is also gaining popularity with its usage internationally.  This is significant in many ways as it would provide support for lower valuation premium over US assets and the Chinese economy would also be able to reduce its reliance on the US monetary system especially with several run-ins between US and China over the last few years.

Market Outlook - January 2022

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.

Market Outlook - December 2021

Policymakers worldwide are getting concerned as the supercharged price readings increasingly indicate that inflation is broadening out beyond goods and services associated with economic reopening.  If inflation keeps widening to even more categories, expectations of higher prices may get entrenched.  However, if the primary cause of inflation is linked to the disruption caused by the pandemic, a premature withdrawal of stimulus, both fiscal and monetary would curb economic recovery and job growth.  In the developed countries like US, Canada, EU, Japan and UK, we are seeing the central banks adopting a tightening monetary policy stance.  This is probably in response to wages increasing and some components of Consumer Price Index (considered to be sticky and sustainable in the long term) rising.  To us, we believe US would be seeing a higher inflationary reading than the past when inflation struggled to get past 2% per year, but it should be lower than the high readings of about 6% in the past few months.  Despite the Fed’s more hawkish tone, it is still committed to seeing further progress towards maximum and inclusive environment monetary loosening environment, and will likely remain wary of overtightening.

When “Omicron” variant was discovered initially in South Africa, financial markets’ instant reaction was to turn bearish.  We have to look to history to guide us on how the future will look like.  The 1918 Spanish flu has over a period of time evolved into less dangerous strains.  They are still deadly for some people but far from pandemic proportions and no longer trigger panic reactions.  Secondly, after almost 2 years since the Covid-19 began, we have developed vaccines to combat this virus.  Everyone in the world knows how to take precautions and are more prepared since its first outbreak.  We view the new variant as a speed bump for the financial markets and the world will adapt to Covid-19 mutations, though it will remain a major source of volatility.

China’s monetary policy runs counter to the other parts of the world, with easing a prominent feature.  There were news that regulators including People’s Bank of China (PBOC) and China Securities Regulatory Commission (CSRC) have made moves to help ease property developers’ financing in the face of falling equity and bond prices across the property sector.  Premier Li Keqiang highlighted that the government will formulate policies based on the needs of market entities and further reduce the RRR in future.  The Central Economic Work Conference in early December, highlighted policy stance in accelerating fiscal spending and infrastructure construction and flexible monetary policy and a marginal easing in real estate sector.

The global economy recovered in 2021, but at a hesitant manner.  On the geopolitical front, the hope for improvement in relations between US and China did not materialize.  We believe 2022 will be a better year economically and the foundations are likely to be laid for a period of sustained and productive transformation.  On the US/China relations, the more likely risk is that mutual suspicions may lead to measures in the areas such as trade, technology and finance which would cause economic slowdown.

We would also be keenly aware of the roll-back of ultra-easy monetary conditions and its effects on the markets and economy from 2022 onwards.  Investing during the Covid-19 pandemic underscores the importance of diversification, and we will continue to adopt this investment stance with a nuance approach towards avoiding companies with weakening prospects whenever possible. 

Market Outlook - November 2021

The tug of war between growth and inflation would intensify in the coming months.  In view of that, market participants are expecting the tapering in bond buying may move at a faster pace over the next few months.  Inflationary pressure in the US are set to remain persistent at least until 1H 2022, due to the confluence of the following factors; supply chain bottlenecks, labour/material shortages,  elevated housing, wage hike concerns and high commodity prices.  However, in the minutes of the Fed’s latest meeting, the policymakers continued to describe the surge as “transitory”.

Major central banks, which had for months maintained that the spike in inflation was transitory, are facing a similar dilemma.  If they tighten monetary policy too soon, they risk short-circuiting the economic recovery, plus transmitting shocks to emerging economies.

Many have grown worried that the global economy is heading towards another stagflationary regime (low growth, high inflation), similar to the one in 1970s.  To us, the global economy is in a far different situation today than it was back then.  Most notably, the supply challenges of today are not permanent and should fade in time, and central banks’ ability to contain runaway inflation has also greatly improved since then.  We shall be monitoring policymakers’ moves in the coming months to gauge the economic growth trajectory.

In China, a series of policy upheavals in the past one year with the goal of common prosperity has pushed up the risk premium in the Chinese capital markets.  China’s deeper ambitions for more sustainable development and inclusive growth do not derail the country’s long term prospects.  Looking back the country’s staggering growth has been uneven, deepening income inequality especially between urban and rural areas.  To boost its economy further, all segments especially lower-income households and less developed cities have to grow together.  Essentially its policy is shifting from speed of growth to quality and sustainability of growth, from efficiency to equality, and from mega corporates to innovative enterprises.

Despite short-term volatility, China’s long-term outlook is still favourable.  We have been positioning into leading companies that possess solid growth prospects, so as to capture attractive structural opportunities.  In the short term, the Peoples Bank of China reiterated a prudent but flexible and targeted monetary policy so as to maintain reasonably abundant liquidity condition, giving us comfort that some form of support is given.

Looking ahead, we expect the markets to continue to oscillate sideways in the near term to digest multiple uncertainties, including soaring commodity prices, higher US yields, and lingering policy uncertainties.  We are optimistic given the re-opening of the world borders as more economic activities would improve from there.  In the long term, we will be looking at governments’ policy moves to ascertain how the global economic pace would be like.

Market Outlook - October 2021

Re-opening of global economies and borders will be an inevitable step after governments around the world went about the business of vaccinating their people on an urgent basis. We should therefore expect the global economic activity to grow in a more sustainable manner going forward. The higher inflation that most developed economies are seeing is also not unexpected. We think the inflation is likely to be transitory rather than persistent, judging by recent released numbers. However, the lingering supply chain bottlenecks may still keep some portions of inflation pressure higher for a bit longer as these issues work their way through next year. 

In US, the Federal Reserve has signalled that it will likely begin tapering if the US economy remains strong. Taking the cue from their latest announcements, it would likely end its bond purchase program by mid-June 2022. It has also set conditions before any lift-off in interest rates were to take place. 

There is little doubt that China’s economy has lost a bit of momentum recently. Industrial production growth slowed in August, and Fixed Asset Investment growth has barely increased. Retail sales has also been expanding at a slower pace. To us, we are not too perturbed by these weaker showing. This is because the fundamental drivers of the economy are still in decent shape, and some of the slowdown is policy-induced and could be dialled back pretty quickly by policymakers if they pose a real threat to a big economic slowdown. 

Following on from our discussion on the Evergrande event, we believe the market’s concern on contagion risk on the Chinese financial system is overstated. Firstly, the size of the company’s total borrowings constitutes about 40 basis points of total credit in China. Secondly, the People’s Bank of China has been actively injecting money through the short-term repo market in ensuring the financial system has sufficient liquidity to prevent clogging. The short-term repo rates have continued to be steady and low during this period, meaning systemic risk in this respect is minimal. We shall continue to monitor the developments in the Chinese property sector with respect to the housing demand and house prices, to assess whether the latest Evergrande situation will indeed pose a bigger macro risk in future. 

On the recent Chinese regulatory tightening measures, there are signs that we could have seen the peak of the tightening phase. There appears to be a greater desire by the government to engage in more regular and deliberate communication with the market players. Furthermore, new regulatory announcements seemed to have tapered in recent times, suggesting that we could be moving to the implementation phase. Lastly, management teams of listed companies have also begun to comment on how the announced measures would affect the companies’ performances. These developments have allowed market participants to have a stronger handle on companies’ long-term earnings growth. 

In summary, we are in the middle of adjusting in a new phase of the economy; characterized by slower growth and uneven expansion in different parts of the world. This growth while uneven, has been affected by various choking points like supply chain disruption and government policies. Our initial assessment on these choking points are probably road bumps and temporary in nature. The bigger picture is that global economic growth would be more sustainable after the borders reopen, and the markets work through these adverse issues.

Market Outlook - September 2021

Medium-term, resilient economic and earnings growth and excess liquidity are likely to remain the dominant market drivers.  Nevertheless, the strongest economic momentum is peaking, which leads to more challenging terrain.  With the positive earnings season catalysts now behind us, it might mean some of the macro headwinds we have just mentioned, could be spilling over into equities.

The current issue for the financial markets is how fast Central Bankers are going to pull back their bond market support.  That will also set the timetable on how soon they will raise interest rates.  Looking back, the Federal Reserve tapering which was announced in December 2013 and began the following month, lasted less than one year.  It went on to raise interest rates one year later after tapering.

We believe the developed economies of the world would continue to be more tentative and leaning on a looser focus in tapering their balance sheets. In the Jackson Hole Symposium, Federal Reserve Chairman Jerome Powell announced that tapering could probably happen before year-end but mentioned that it would not be in a hurry to raise interest rates after that.  Markets took this as a signal that the Federal Reserve would continue to support the economy with low-interest rates.

In Asia, China set expectations that further monetary policy easing steps are in the works after the People’s Bank of China (PBOC) reduced the banks’ reserve requirements ratio recently.  Additionally, PBOC will be providing RMB300 billion of low-cost funds to banks for the purpose of lending to small and medium size companies.  We see more scope for some fiscal support given general government revenue well ahead of expenditure, and that infrastructure projects will enter the implementation stage at a faster pace at the end of this year and early next year.  Furthermore, Vice-Premier Liu He said the government would continue to support private businesses despite a regulatory crackdown across the technology and education sectors.

As an extension to our discussion in our previous month’s newsletter on the regulatory tightening in China, it was announced that the government will emphasize the strengthening of anti-monopoly measures and deepening the implementation of fair competition policy.  This shall be the medium-term objective for deepening overall reform. The next phase of the country’s economic development is about promoting high-quality development and promoting common prosperity.

In the long term, we believe the Chinese market continues to promise growth amid the potential for higher domestic consumption and continued gains in investment.   In the short term, we are at least seeing the government being proactive in shoring up the country’s economy with tweaks to counter the headwinds.

An issue worth talking about is China Evergrande Group.  It is one of the largest property developers in China. Presently it is in the unenviable spotlight of experiencing a liquidity crunch after regulators curbed their funding access to control property prices and sector leverage.  It is struggling under massive debt loads built during the boom years in the property market.  This has a negative effect on the financial markets and economic contagion from a default event of this scale.  We are relying on the policymakers to get it right, and in our opinion, their track record has been extremely good as shown in how they have gone about handling the Asian Financial Crisis, which gives us a lot of confidence.  To begin with, the government’s fiscal position is also strong.  We will be monitoring this event closely in the medium term.

We are probably in the mid-cycle of economic growth globally.  There are current and new topical issues we are encountering each day.  In our view, this is a natural course we should expect if history were to be of any guide.  So far, the financial markets have already discounted a lot of these issues with some of the major Asian companies’ share prices declining sharply in the process. This is a market repricing process mechanism and it presents us an opportunity to scour for good ideas at more reasonable valuations.

Market Outlook - August 2021

The debt ceiling issue of the US government may lead to higher volatility of asset prices. When the US government hits its debt ceiling, the overall performance of the market depends on the duration of the potential crisis and the level of potential default risks. We believe the Congress will ultimately come to an agreement in the next 2 months, after some hard bargaining and strong words from both the Democratic and Republican parties. To us, any weakness in share prices is a buying opportunity. 

China seeks to fulfill its ambitions as a world-leading economic and technology superpower, and to transition from an export-led growth model to achieving more sustainable and high-quality growth. To do so, the government is aggressively addressing a mix of critical challenges related to excesses and weaknesses in various markets and sectors, an ageing workforce and tensions with the US. Its latest efforts to put in more regulations are not dissimilar to the US and European Union’s antitrust efforts on the big internet companies. The key difference is that under the China model, the measures meted out are performed clinically with least resistance from the corporates. We need to recognize the manner at which China has gone about its regulatory moves will create volatility in the markets. In general, investors value a steady operating environment underpinned by market-oriented policies. 

In China, there is fear that the latest crackdown on the fintech, education, food delivery and property sectors could expand to other industries such as health care, as the government looks to tighten its grip on big companies and reduce the wealth gap. 

The beginning of the regulatory clampdowns started with Ant Group, an Alibaba’s FinTech offshoot and then to DiDi Chuxing. We believe the intervention will reshape the tech industry in China. So far, the case against Alibaba took the Chinese authority only four months to complete, whereas it will take years for the US and EU regulators to tackle Facebook, Google and Amazon, which are ready to fight tooth and nail. 

We do not think the Chinese government is out there to destroy the tech giants, as they are already part of the future growth of the country, where the latest innovations are already underway. A case in point to note in the 14th Five Year Plan, the Chinese government has outlined sectors it wants to prioritize, including semiconductors, 5G, renewables, infrastructure, new energy vehicles and artificial intelligence. 

In the near term, the latest regulatory events in China may cause bouts of volatility and investors should brace for that. Sentiment is likely to remain subdued until investors gain higher conviction that the regulatory reforms are fixing short-term issues for long term benefits. In the medium to long term, we maintain a constructive view on Chinese equities and believe the current pull back and volatility may offer opportunities to accumulate companies that will benefit from long-term structural themes under the 14th Five-Year Plan. 

The global economic outlook will be a key focus for us, as this is the bedrock of what investing in financial markets is about. Following on from our discussion on this topic in the last newsletter, the latest global economic releases increasingly confirm our view that we are entering a mid-cycle phase for several economies. At this stage of growth, it is understandable that talks of tapering of monetary policy keeps coming up. We continue to stick to our views that the tapering would happen in 2022 despite calls from some of the Federal Reserve members to begin the exercise this year. In China, we believe the current market volatility in the Chinese stocks is unlikely to impact China’s macro-economic outlook significantly. The Chinese government has also sufficient dry powder to shore up growth if needed. It has recently begun to inject liquidity by cutting the reserve requirements ratio for banks