Investors are buffeted by more bad news thus far this year than most have the stomach for. What is the outlook for the rest of this year and where should they put their money? We talk to the experts
It has been a challenging year thus far for investors across the world; just when it seemed the world was starting to push back the Covid-19 pandemic, the Russo-Ukrainian war started and triggered a global shock.
Among other events, the war caused prices for commodities to rise, including crude oil, grains and gas, exacerbating inflationary pressures. To top it off, the resurgence of Covid-19 cases in China caused the authorities to impose some of the strictest movement restrictions in major cities, leading to supply chain disruptions and growth pressures.
Equity markets took a big hit; year to date, the S&P500 has fallen 13.26% as at June 8 while the tech-heavy Nasdaq Composite Index is down 23%. The mega tech names, represented by the NYSE Fang+ index, are down about 30%, with Apple, Amazon, Google’s parent company Alphabet, and Microsoft seeing falls in their share prices. Meanwhile, MSCI World, MSCI Emerging Markets and MSCI ACWI World Index have all declined between 12% and 13% as at end April.
And that’s not all; bond prices are also on the rise. As the US Federal Reserve tries to tamp down on inflation, it has taken an increasingly hawkish stance and is likely to rate hikes at a more aggressive rate moving forward.
In early May, the US central bank’s benchmark interest rate was raised by 0.5 percentage points to a target rate range of between 0.75% and 1%, which is the largest since 2008. More rate rises are expected, with the Economist Intelligence Unit expecting the Fed to raise rates seven times this year, reaching 2.9% in early 2023.
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Not all doom and gloom
At the start of May, the yield on the 10-year US Treasury hit 3% for the first time in three years. This, combined with widening credit spreads, falling equity markets and the strengthening US dollar, is very significant in tightening conditions as it impacts both growth and inflation expectations, Standard Chartered Bank chief investment officer of wealth management Steve Brice tells The Edge Singapore.
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Brice expects the Fed to continue with its hawkish stance until inflation expectations come down even further. “This does reduce the risk of a policy mistake in terms of inducing recession, most of our indicators still point to a continued expansion although growth is expected to slow. In fact, the slowing growth is already expected even before the China lockdowns and the Russian invasion,” he adds.
AXA Investment Managers’ chief investment officer Chris Iggo concurs but does not see an outright recession for now. Rather, he expects the US to achieve a soft landing. The firm’s current US GDP growth forecast is 2.5% this year, which is a significant slowdown from 5.7% in 2021, and is set to further ease to 1.4% come 2023.
Iggo agrees that given the small margin for error, there is a possibility that the US economy would see one or two quarters of very slow growth or even negative growth, thereby satisfying the definition of a “technical recession”. “But we don’t think it will be a recession to the extent of seeing a significant decline in activity or a significant increase in the unemployment rate. It’s more of a soft landing or a glide path to a below-trend rate growth in response to monetary easing,” he says.
AXA IM’s inflation forecast for the US is on average 7.6% this year, which Iggo says should not be a surprise given recent inflation numbers. With oil prices still above US$100 ($137.46) a barrel and prices still volatile, there is a risk that inflation would stay high. Yet, the firm does expect it to ease over the next year at 4% CPI in the US.
“What that means is the Fed does need to raise rates further but if our view is right and it is a soft landing, then that would start to improve the outlook for the bond and equity markets,” adds Iggo.
It certainly is not all doom and gloom. For one, the S&P Global PM Commodity Price and Supply Indicators, which tracks the development of price pressures and supply shortages, has indicated a slight softening in price and supply pressures across the global manufacturing sector in May.
In a June news release, S&P Global Market Intelligence’s economist Usamah Bhatti says prices are at their lowest in three months, though they remain five times above the usual level. Electrical items and semiconductors remained among the worst affected, while reports of higher freight costs were exacerbated by China’s strict Covid-19 restrictions. “Overall reports of global shortages were the lowest since February, albeit still six times above the usual level.”
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Tailwind to outperformance
Subject to further downward revisions if China’s lockdowns were to persist, Natixis economists Alicia Garcia Herrero, Trinh Nguyen and Xu Jianwei estimate China’s GDP will expand by 4.2% this year, well below the official target of 5.5%. This is clearly a negative for Asian markets such as Singapore, Thailand and South Korea, while India, the Philippines and Japan are more insulated.
The economists point out that Chinese demand for imports is likely to remain weak moving forward, affecting Singapore’s growth the most, followed by Thailand and Malaysia.
That being said, Morgan Stanley sees a safe haven in Singapore with relatively robust macro conditions. Its relative currency strength is conducive to capital flows to Singapore dollar assets, providing support for the equity market.
Outside of Singapore’s border, Asia ex-Japan continues to be Stanchart’s most preferred equity market. This is due to its “relatively undemanding” valuations, with its 12-month forward P/E ratio at an 18% discount to global equities.
“With China stepping up policy support in recent weeks, significant easing of Covid-19 lockdowns should provide a tailwind for China and Asia ex-Japan equities to outperform in the coming months,” Stanchart’s Daniel Lam and Fook Hien Yap wrote in their June global market outlook report.
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Cover photo: Bloomberg
