After the pandemic-fuelled upheavals, subsequent supply bottlenecks, and China’s policy pivot to sustainability themes in 2021, investors might be looking forward to a return to some form of normal in 2022.
But don’t count on it.
“Disruptions appear more likely to dissipate than to disappear, causing asset markets to move in waves as the year progresses”, said Michael Kelly, global head of multi-asset at PineBridge Investments.
A rapid loosening of supply constraints that in turn helps bring core inflation back toward 2% is unlikely, and the big change in 2022 will be the visible hand of monetary excess slowly pulling back, said Kelly.
“We see a choppy flatness ahead, at least for the first half of 2022, a standoff between positive [albeit slowing] cash flow growth and reduced monetary excess, and its impact on capitalisation rates. This standoff, as 2022 unfolds, looks poised to be quite exciting, with bigger winners and bigger losers.”
Kelly said the first asset class likely to catch a wave will be equities, especially in developed markets, when bottlenecks start to clear toward the end of the year. Two markets on his team’s radar are Japan equities and China A-shares.
“In China, we disagree with those who assert that this market is ‘uninvestable’. For those new to China, however, we think it’s not a place to try a blanket, index-based approach,” he said.
ESG PUSH IN CHINA
Cynthia Chen, lead manager of the firm’s A-share portfolios, believed China’s recent regulatory changes will set the tone for 2022, as the focus on sustainability becomes increasingly central to the Chinese economy.
While the market has focused on selloffs, investors should not lose sight of a more important and long-lasting aspect of the regulatory shift: China’s elevation of sustainable business models and strong governance underscores the importance of environmental, social, and governance (ESG) factors in stock selection, Chen said.
“Going forward, companies with better ESG performance are likely to be the disruptors rather than the disrupted,” she added.
That said, China’s economic growth may see downward pressure amid slowing property sector activity and power shortages that have led to suspension of production in some regions.
Economist Markus Schomer echoed the opinion, as energy supply issues, unresolved trade frictions with the US, and a stressed housing sector suggest downside risk to China’s 5.7% growth forecast for 2022.
But while there are reasons to be circumspect on corporate earnings prospects, this environment can be seen as an opportunity to accumulate high-quality stocks, as valuations have become supportive in certain sectors.
“There is some uncertainty over whether more regulatory changes are in the offing, but we believe the A-share market would carry a lower policy risk premium than that in offshore markets given that domestic investors typically have higher confidence on policy visibility,” Chen said.
INDIA TO OUTPERFORM
On the other hand, India is set to outperform all other major economies in 2022, after its equity market becomes one of the best performers in Asia this year.
After the lockdowns in the spring of 2021, the economy rebounded strongly in the third quarter and has carried that momentum into the fourth, as shown by the latest purchasing managers’ indices (PMIs),
While India’s GDP growth is not likely to hit the International Monetary Fund's (IMF) forecast of 9.5% in 2021, Schomer said the strong finish to the year means India should be on track to beat expectations for 2022.
In its robust equity market, PineBridge’s global head of equities Anik Sen sees opportunities from India’s investment in public digital software, which is radically changing the way business, notably banking, is conducted.
“We are highly constructive on companies that are seeing rapid growth by using their software capabilities and marketing prowess to take advantage of the improved public infrastructure to create low-friction customer interactions,” he said.
ASIA FIXED INCOME: FIT AND RESILIENT
Meanwhile, except for a few sectors and idiosyncratic situations, Asia’s steady and improving credit fundamentals should offer a strong foundation for the region’s fixed income market in 2022.
“We expect credit spreads to tighten in the next 12 months, with pronounced credit divergency alongside the expected increase in the number of defaults in 2021. The default rate is likely to rise to a number in the low teens in full year 2021,” said Arthur Lau, head of Asia ex Japan fixed income.
“However, we expect it to fall to a single digit in 2022. We view these default cases to be mainly idiosyncratic rather than systemic in nature, which call for thorough credit differentiation,” Lau said.
With Chinese high yield (HY) bonds accounting for over 50% of Asia’s HY bond market, the development of this segment will determine how the broader market will perform over the next 12 months.
In the near term, the Chinese property sector is expected to remain under pressure as concerns about the sector’s liquidity and refinancing risks intensify, but Lau believed the government has adequate tools to contain any risk posed by this sector.
For Asia’s investment grade (IG) market, volatility is expected to ease in the coming 12 months given the overall benign economic backdrop.
“US interest rates will likely be the major source of risk. With a more uncertain growth outlook and interest rate risk, an IG portfolio with higher overall credit quality should generate better risk-adjusted returns,” he said.
INFLATION: LOOSE FOR LONGER
Unlike the West, inflation in Asia hasn't accelerated as much as it did in Europe or the US. Asian central banks are under less pressure to remove emergency policy accommodation.
“In a world of reemerging policy rate differentials, this should lead to weaker Asian currencies and stronger terms of trade. We are not likely to see a return to the level of globalisation we saw prior to the pandemic, which will weigh on the long-term growth prospects of the region,” said Schomer.
“Yet despite these headwinds, the IMF’s 5.1% growth forecast for Asia is still the strongest for any region of the globe,” he said.
For more economic and asset class insights, please see here for PineBridge Investments’ full 2022 Investment Outlook: Investing in a Climate of Change.
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