Quarterly Market Outlook - Q1 2022

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Investment involves risks. This information is for general reference only.

 

Market Outlook – Asset Class 1Q 2022

Equities - Slightly Overweight


- Although global economic growth continues to decelerate, the global economy should continue to expand with a rate higher than long-term average

- Global financial conditions are expected to tighten as central banks are prepared to withdraw some crisis-era monetary stimulus. Strong flows into equities continues

- Fundamentally, earnings growth expectations remain on a positive track, albeit at a much slower pace than 2021. While all major financial assets have higher valuations relative to history, equities remain relatively attractive and may provide positive real returns as inflation rises

- Longer than expected inflation overshoots may induce an earlier first Fed rate hike next year. A premature shift in monetary policy could create volatility to the stock market. China property-led economic slowdown and Omicron variant spreads are also key risk events to watch

 

Fixed Income - Neutral


- Government yields might rise moderately boosted by inflationary pressures and central banks tightening expectations

- The yield curve tends to flatten as investors price in a modest slowdown in recovery

- High yield bonds with higher spreads and shorter durations could act as a cushion against interest rate risk and may benefit from a still decent economic expansion

 

Market Outlook - Equities 1Q 2022

U.S. - Slightly Overweight


- Strong economic growth and solid earnings expectations provide further upside to US equities

- Although the Fed is accelerating its tapering process, the first rate hike may not happen until around mid-2022

- If high inflation sticks around, signals of faster-than-expected rate hikes might trigger volatilities in stock markets

 

Eurozone - Slightly Overweight


- Despite cases of the Omicron variant rising in Europe, the massive vaccination campaign rolling out is likely to offset the impact of restrictions reimposed by European government on economies

- The European Central Bank is expected to continue with an accommodative stance compared to other central banks in the world. Easy financial conditions should be supportive to equities

- Longer than expected global supply chain disruptions might hold back growth in Eurozone economies and adversely affect businesses that rely heavily on international trade

 

Asia ex-Japan - Neutral


- As vaccination rates accelerate, Asia is expected to sustain its strong rebound and remain one of the fastest growing regions in the world

- As China has become an increasingly important export market for many Asian countries, the linkage has made some countries vulnerable to the risk of China’s economic slowdown

- Asian equities may face headwinds from capital outflow if the Fed accelerate its tapering process and raise rates sooner than expected

 

Japan - Neutral


- Japan’s economy may shrink at a faster pace than expected due to a fall in exports caused by supply-chain constraints and lower consumer spending amid fears over the new Omicron variant

- Monetary policies are likely to stay accommodative given low economic growth expectations

- The approved record $490 billion spending package may support recovery from the pandemic, which marks a contrast with a global trend towards normalization

 

HK - Slightly Underweight / China - Neutral


- China’s campaign to tighten regulation across swathes of the nation’s industries does not show signs of abating, putting pressure on Hong Kong listed stocks

- China’s economic growth is expected to moderate further. The recent RRR cute announced by the central bank is likely to reduce the lending cost and cushion the economic slowdown

- China is likely to add fiscal stimulus as key goals from top officials for 2022 include counteracting growth pressures and stabilizing the economy

 

Market Outlook - Fixed Income 1Q 2022

High Yield - Slightly Overweight


- Credit spread is expected to widen moderately, while strong corporate fundamentals and economic growth remain supportive to high yield bonds

- Shorter duration high yield bonds are likely to provide investors with higher risk adjusted returns in the current environment

 

Investment Grade - Neutral


- Total returns for investment grade corporate bonds may face headwinds with inflation fears rising and higher government yields

- Record low interest rates environment prompts investors to search for yield in corporate bonds

 

Sovereign - Slightly Underweight 


- Treasury yields are expected to go higher with higher inflation expectations. The real yields may rise as the Fed tapers but are likely to remain in the negative territory

- From an asset allocation perspective, the current level of government bond yields may not be attractive relative to credits

 

 

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Investment involves risks. Past performance of any particular fund or product mentioned in this document is not indicative of future performance of the relevant fund or product, and the value of the each fund or product mentioned in this document may go down as well as up. You should not invest solely in reliance on this document. There is no assurance on investment returns and you may not get back the amount originally invested.

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