During this period of uncertainties, we advocate calm and rationality in dealing with the major headwinds
Chief Investment Office1 Apr 2022
- Global risk assets to stay resilient amid major headwinds from policy pragmatism and economic growth
- From a cross-assets perspective, we maintain preference for equities over bonds
- Upgrade China to Overweight as the government commits to support growth and business regulation
- In credit, go up in quality with DM Corporates; favour 5Y duration bucket for better outperformance
- Seek growth and income enhancement with Private Equity and Private debt; hedge inflation with gold
Global risk assets started 2022 in turbulent fashion as the combination of rising bond yields and geopolitical tension in Ukraine triggered the classic flight to safety. Global equities and high yield bonds lost 11.9% and 7.4% respectively while gold – a traditional safe haven trade – registered gains of 8.7%. Indeed, initial concerns on Fed monetary tightening were soon superseded by Russia’s invasion of Ukraine which potentially marks the start of a new Cold War split along the ideological lines of democracies vs autocracies. As the west stands in unison behind Ukraine and imposed harsh sanctions on Russia, global disruptions in the energy/commodity space will ensure that inflation stays elevated.
The situation in Ukraine remains fluid and the Russian invasion could morph into a long-drawn military campaign given stiff resistance by the Ukrainians. Adding on to the proverbial wall of worries for investors is the recent pivot in market narrative from “reflation” to “stagflation”. Stagflation refers to periods where inflation is strong while growth is weak. This is a paradox as weak growth is commonly associated with low inflation. Unsurprisingly, stagflation is the worst growth/inflation combination as it erodes consumer spending and decreases aggregate demand.
During this period of uncertainties, we advocate calm and rationality in dealing with the major headwinds and our core views are:
- Russia-Ukraine crisis: The crisis will not lead to economic contagion given the insignificant size of the Russian economy from a global context. And historically, military conflicts have limited impact on risk assets.
- Stagflation fears: A repeat of 1970s-style stagflation is not on the cards given that the high inflation which we see today is accompanied by steady macro fundamentals.
On the flipside, there are several tailwinds that will underpin the resilience in global risk assets.
In the coming months, we believe investors’ concerns will be focused on the following topics which we address in this quarterly:
- Will the Russia-Ukraine conflict have a long-term impact on risk assets?
- Will rising bond yields trigger a bear market?
- Will inflation continue to overshoot?
- Has Technology stocks “priced-in” the impact of rising bond yields?
