In this perfect storm for the global economy, the hits keep on coming — growth is decelerating faster than anticipated, inflation is stickier, monetary policy is normalised faster and market returns so far have been outright poor, says Credit Suisse.
Even well-diversified portfolios have taken a hit, says the Swiss bank in its 2H2022 outlook.
That said, investors should take market turbulence in their stride, and it would be a mistake to leave markets at this stage, says Credit Suisse. “Once we arrive at the peak in the repricing of expectations, it is likely that we will see a rebound in both equities and bonds. For now, investors should continue to diversify their portfolios.”
To diversify, Credit Suisse suggests investors look to the East. In its June 29 outlook, it highlights China, Hong Kong, Singapore, Thailand, and India as markets worth a closer look at.
“We maintain an attractive return outlook over the next three to six months, as depressed investor sentiment and positioning suggest upside potential in the near term,” says Credit Suisse.
“We expect earnings to normalise yet remain supportive, thus underpinning the equities outlook.”
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Rebound in China trade
Credit Suisse’s chief investment officer of Asia Pacific John Woods says: “A key component of our equities-overweight has been — and continues to be — China, where the latest moves by the government improve the prospects of a large fiscal support for the economy.”
Efforts by the Chinese government to support economic growth, the continued easing of Covid-19 disruptions in both Shanghai and Beijing, and the potential of a scaling back of tariffs on Chinese imports have all been a balm for China’s equities, notes the bank.
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The rebound in trade activities also suggests that perhaps supply-chain disruptions are being resolved more quickly than previously anticipated. The improving economic momentum suggests that the overall earnings sentiment on China equities should stabilise and eventually improve from here, they say.
Although fiscal spending as a share of GDP will likely be comparable to that of 2020 and regulatory uncertainties appear to be easing, Credit Suisse expects the lockdown uncertainty to hamper a recovery in domestic demand. “There is also the risk of a slowdown in external demand in 2H2022, as monetary tightening in advanced economies accelerates. We thus expect full-year growth of just 4.8%, from 5.9% at the start of 2022.”
They add: “We hold a medium-term US dollar and Chinese yuan outlook that skews higher, namely due to stronger imports from increased policy stimulus, and a return of tourism outflows later in the year. For now, we see the pair at 6.58 and 6.85 in three and 12 months respectively.”
Other Asian territories
Although the economy of Hong Kong has been gradually recovering from Covid-19 restrictions and bolstered by the disbursement of consumption vouchers, the pick-up of private consumption — which accounts for 66% of local GDP — rests largely on the prospects of border reopening and a resumption of international travel.
That said, earnings have been lagging relative to other developed markets and forward-looking indicators like purchasing managers index (PMI) and business surveys suggest the recovery is still soft, says Credit Suisse. “Property prices are also at risk as monetary conditions turn gradually more restrictive.”
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Credit Suisse continues to see a “little material threat” to the Hong Kong dollar peg. “The authorities are likely to continue their policy of allowing domestic interest rates to lag the US. This is meant to support the economy by ameliorating the lockdown conditions for residents. We do not think this is a long-term solution, but the authorities have the necessary foreign exchange reserves to maintain the discount in local interest rates for a while.”
On July 24, Hong Kong’s Financial Secretary Paul Chan said Hong Kong’s foreign exchange reserves of US$440 billion ($607 billion) are enough to maintain the linked exchange rate system with the US dollar. Chan’s assurances came a few days after Hayman Capital Management claimed the reserves could be exhausted by the end of August by Hong Kong’s bid to defend its currency.
Bank-heavy Singapore might benefit from the gradual rise in US yields, while REITs stand to gain from a revival of business travel and other service activities, says Credit Suisse.
The three local banks make up more than 40% of the weightage of the Straits Times Index (STI), while REITs are a popular asset class for conservative investors who prefer a certain assurance of returns.
Economic data suggests the ongoing recovery in the services sector should persist even as the goods sector slows, they add. “At this juncture though, we expect equities to perform in line with global equities.”
Credit Suisse says the Singapore dollar nominal effective exchange rate is likely to continue to climb higher to the top of the policy band, given that inflation and re-hiring are at elevated levels on account of the reopening.
Note that Credit Suisse’s outlook was delivered before July 14, when the Monetary Authority of Singapore re-centred upwards the exchange rate policy band in a surprise move. S
ays Credit Suisse: “Our US dollar and Singdollar forecasts are at 1.35 and 1.33 for three and 12 months, given that the reopening will likely continue for much of 2H2022, and inflation will likely remain elevated.”
Meanwhile, in India, local equities have been weighed down by a hawkish central bank and margin pressures from higher commodity prices, especially oil.
“We may see a moderation in earnings revisions going forward. Nevertheless, conditions for investment growth remain supportive, such as low corporate leverage and healthy banking balance sheets. Foreign ownership is back to 2013 lows, but domestic investors are now more influential and should be able to support equities beyond the near-term volatility. We expect the market to perform in line with emerging markets.”
Attractive fixed income
Credit Suisse also says it has “recently begun recognising the incremental attractiveness” of fixed income relative to equities.
“This is in light of the accelerated policy tightening, which would likely raise long-term yields to our target faster than expected.”
As expected, Credit Suisse favours government bonds and investment grade credits. “We expect the credit cycle to penalise lower-rated credit.”
While Credit Suisse recommended “selective exposure” to Asia’s fixed income, it is avoiding China’s beleaguered property sector. “We maintain our preference for Asia high yield ex-China property and China sovereign bonds. Both these sub-asset classes offer stable fundamentals and an attractive yield premium over their developed market peers, and have demonstrated a good amount of resilience against recent market volatility.”
Credit Suisse expects a 12-month return of 5% for Asia high-yield ex-China property and 3% for Asia investment grade and China sovereign bonds.
“Property demand is still soft [in China], and funding for struggling developers is still constricted. On China property bonds, we note that policy developments over the past few months have been positive, but we maintain our cautious stance until we see more consequential policy moves to ease the difficult revenue and funding conditions facing developers,” says Woods, adding that Credit Suisse maintains a neutral stance on all Asian local and hard currency sovereign bond markets save for India local currency sovereigns, which it expects will underperform.
“India’s solid growth recovery and rising inflation will likely lead its central bank to maintain its recent hawkish bias… Moreover, bond issuance will likely remain elevated after the government announced plans for a wider-than-projected fiscal deficit in the FY2023 federal budget.”
In the near-term, central banks are “strongly committed” to bringing inflation rates down and are willing to risk an economic slowdown to achieve this goal, says Credit Suisse. “We have reduced our 2022 global GDP growth forecast to 3.5% from 4.0% at the start of the year, but we still believe that a scenario of stagflation akin to the 1970s will be avoided.”
Adds Woods: “We continue to see low risk of a US and global recession over the next 12 months, and expect some relief from a bounce in industrial production momentum. Strong corporate finances and sound household balance sheets remain key supports for the US and European economies.”
In the Eurozone, growth has held up better than Credit Suisse expected since Russia’s invasion of Ukraine started, as a post-Covid-19 rebound in services offset weaker manufacturing activity.
“However, forward-looking indicators have deteriorated, with the lingering conflict and tighter monetary policy pointing towards weaker growth ahead,” they add. “We now expect below-consensus GDP growth of 2.4% in 2022 and 2.0% in 2023. A disruption to gas imports from Russia remains a key downside risk.”
Credit Suisse sees the Euro and US dollar at 1.03 in three months, which could “progressively recover” as growth risks eventually fade and the European Central Bank continues to tighten policy. Its 12-month Euro and US dollar forecast stands at 1.07.
