Quarterly Market Outlook - Q1 2022

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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