The markets are no longer as buoyant, relative to a year ago. However, there are plenty of reasons to remain upbeat for the coming year, especially for growth assets. “While we expect uncertainties over the coming quarter to increase, we would view any ensuing market volatility to be buying opportunities,” says UOB Asset Management (UOBAM).
The asset management’s more-positive sentiments on growth assets come on the back of improving sentiments in the market. Vaccination rates worldwide have improved and the “new norm” is solidifying. The world has learned how to live with Covid-19 and now is the time for growth.
In UOBAM’s quarterly investment strategy webinar, Anthony Joseph Raza, senior director, multi-asset strategy for UOBAM, says: “We are calling this quarter (4Q) one that has long-term growth and constructive elements, but with near-term risks. We have to try to balance that.”
Broadly, Raza expects the growth outlook for the next couple of years to be robust, as “we are in an expansion period”. Additionally, interest rates in the short term are also expected to stay low for a few more years and this, according to Raza, is a healthy climate for investing, so investment markets are likely to perform well over the coming year.
UOBAM expects several more years in this expansionary phase, with global GDP growth set to remain above trend in 2021 and 2022. Interest rate hikes are also expected to be about a year away.
However, UOBAM continues to see elevated near-term risks in the last quarter of the year. As such, it remains moderately cautious and neutral in its overall positioning, while keeping a lookout for signs of consolidation in the market before it resumes its positive momentum.
“We are short-term neutral but long-term positive in our positioning. We have reduced equities and high yield credits to neutral. Our overweight cash position allows us to save for opportunities resulting from any potential near term volatility. We stay neutral on fixed income and commodities, and are overweight in alternatives,” says UOBAM.
“Stunningly resilient”
The way UOBAM sees it, there are several aspects of the current macro investing landscape that point to a healthy backdrop for investing in growth assets.
Global GDP growth is expected to be above trend for 2021 and 2022, with UOBM deeming global GDP growth above 3.5% to be a healthy year of expansion. The consensus global GDP forecast is 6.0% for 2021 and 4.5% for 2022.
On the high GDP growth in 2021 and 2022, Raza says: “Broadly, there is a lot of confidence that there is growth in the markets that companies around the world are going to be able to participate in, which asset classes will then benefit from.”
Meanwhile, the asset management house expects global corporate earnings to grow by over 30% in all the major regions except China. And while China may lag behind the rest of the world in 2021, it outperformed in 2020 and is expected to do so again in 2022.
“Earning growth around the world has been stunningly resilient. Corporations seem to have managed this crisis very well and in 2021, we are getting over 30% earnings growth in most of the major regions. And this trend can be seen m-o-m as this goes along. As high as these growth targets are, every month we see positive revisions. We do not see any weakness where these numbers are looking too high and analysts have gotten ahead of themselves,” says Raza.
"As such, we see clear evidence that we are in the midst of a healthy expansion that is likely to last a few more years. Investors wanting to invest for the medium term may wish to overweight growth assets like equities, credits, properties and commodities,” he adds.
On equities in the Asia Ex-Japan region, the macro backdrop for the Asia equities market remains supportive in the mid-to-longer term despite concerns over the Fed’s tapering, Delta-variant driven growth downgrades, China regulation tightening and rising cost pressures.
In the shorter term, while concerns over tapering by global central banks appear well-priced, UOBAM has turned cyclically cautious on Asia amid the heightened regulatory risk environment in China and its associated spillover effects. The backdrop of a normalising global earnings recovery trend is also likely to weigh on Asia’s market performance in the near term.
To that end, UOBAM expects greater dispersion of market returns ahead and now favour Southeast Asia over North Asia, as it believes that Southeast Asia offers better risk/reward and expects these countries to lead the rebound in Asian economies as inoculation rates continue to gain momentum.
In this vein, UOBAM has reduced its exposure to North Asia. It has downgraded China to negative from neutral as domestic regulatory policies will continue to be an overhang in the near term with the potential to impede China companies’ profitability. Within China, it favours sectors that have policy tailwinds or low regulatory risks such as technology hardware/semiconductor, de-carbonisation/green energy and electric vehicles.
The asset management house is also negative on South Korea, Philippines and Hong Kong, while remaining neutral on India, Indonesia, Taiwan and Thailand. It has a positive stance on Singapore and Malaysia.
Singapore remains a bright spot within Asean as the economy remains on track for further normalcy in business activities based on its commitment to treat Covid-19 as an endemic, while Malaysia’s more positive outlook stems from UOBAM’s expectation that its lacklustre GDP is now largely discounted amid an improving political backdrop and rising inoculation rate.
Near-term risks
“Nevertheless, we do care about trying to anticipate the near-term tactical ups and downs in the midst of an expansion. We see the number of risk issues to have grown over recent months after a year of strong performance. These increased risks raise the potential for a near term correction,” says UOBAM, whose base case outlook is for current risk issues to prove to be fairly benign over the medium term.
However, due to the increasing number of risks, there is a greater likelihood of one of these issues not matching its base case assumptions.
With that, UOBAM is closely watching five key risks in the market, namely slowing growth momentum; uncertainties over the Delta variant; tightening bias; China’s regulatory clampdown; and inflation risks.
“Our base case is fairly benign; we don’t think that the pandemic is going to stop the world from reopening, we don’t think that China is going to create a systemic problem for Asia, we don’t think that the tightening of policies will stop the performance in markets. But as we are dealing with the current situation, the list of risk issues may be a little long, but it is when it is this long that makes it easier for the base case to not go according to plan and surprise us on the downside. So in periods like this, we do end up being a little more cautious,” says Raza.
With the current macro environment in the midst of a healthy expansion and the one-year outlook seemingly attractive, risk issues linger and although it is not UOBAM’s base case that these risks will create a significant market correction, it does find that the chances of such a correction in the coming quarter have grown.
Overall, Raza explains that broadly, through the current situation, UOBAM is not making “big bets” this quarter. Although it is still a good time to invest, the asset manager’s main goal this quarter is to pull through this period and find entry points for the above mentioned growth passes.
As such, UOBAM’s tactical positioning is to turn a little less aggressive for the coming quarter. It is taking a neutral call on equities and aims to have a little cash on the sidelines to take advantage of any corrections.
UOBAM's market outlook
Photo: Bloomberg
