Quarterly Asset Allocation - Q3 2022

3Q Investment Outlook: Short-term outlook for equities remains neutral while the global economy may continue to slow

Q: Principal Asset Management (Asia) Investment Management Team

A: Crystal Chan, Head of Investment Specialist of Principal Asset Management (Asia)

Q: Can the global economy achieve a “soft landing”?

A: With supply bottlenecks persist, high inflation denting consumer confidence, and tighter financial conditions, the global economy may continue to slow in the coming months. The global growth rate is expected to settle at about 3% in 2022.

Among major economies, we are more pessimistic on Europe. With high inflation, the era of negative interest rates may end quite soon. If the Russia-Ukraine conflict drags on, the probability of a recession before the end of the year may rise rapidly.

Q: Can the Fed halt the pace of interest rate hikes this year?

A: The economic growth rate in the U.S. may slow to below the long-term trend in the second half of the year. However, supported by relatively high levels of savings, consumer demand and business investment, the U.S. economy may be more resilient than the other developed markets. Our base case is that recession risks may not rise sharply until the second half of next year or in early 2024.

While oil and food prices stay high, the decline in inflation is expected to be extremely slow. Before the end of the year, the U.S. CPI may only fall slightly to about 6%. The Fed may continue to hike quite aggressively to fight inflation. Benchmark rates may reach at least 3.25% by year-end.

Q: Will the Chinese economy rebound in the second half?

A: Economic data in China had begun to improve recently and the economy is expected to improve in the second half of the year. The central government may continue to accelerate the intensity of economic stimulus measures. Compared with conventional monetary tools, the central government may focus on the fiscal policy tools or supportive policies for individual industries, to stabilize the economy.

However, with the risk of a resurgence of Covid cases, if China’s “zero-Covid” policy remains in place, the economic growth rate may be impacted negatively again. Coupled with weakening external demand, the full-year growth rate may fall short of the 5.5% target.

Q: How should equity assets be allocated in 3Q?

A: As the market has accumulated some losses, there is a chance for a bear market rally backed by extreme oversold in the markets and relatively reasonable fundamentals. However, once the economic data turns distinctly worse and recession fears rise sharply, the stock market may pull back significantly again. Overall, we maintain a neutral stance on equities. Among them, we are slightly bullish on Asia, Japan and Hong Kong. While neutral on the U.S. and China, we are slightly bearish on Europe.

Q: How should bond assets be allocated?

A: For the third quarter, we remain neutral on fixed income overall. Although valuations are relatively reasonable, the Fed may not be able to slow the pace of policy tightening in the short term, real rates and overall bond yields may remain high in the third quarter. Our view on sovereign bonds is neutral. As for investment-grade bonds, even though total returns may be affected by higher bond yields, backed by relatively solid corporate fundamentals, our view is neutral.

Crystal Chan
Head of Investment Specialist
Principal Asset Management (Asia)

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