Economics

4Q 2022 Market Outlook – Selective Investment Opportunities in Volatile Times Ahead

29 Sep, 2022

The Federal Reserve became more hawkish during the September FOMC meeting as it signaled a faster pace of interest rate hike which would stay higher for longer. Similarly, central banks globally also followed by raising interest rates which would be negative for risk assets. There are however still selective investment opportunities like China, Japan and Singapore equities. The Japanese Yen has weakened to levels not seen since the 1990s, which makes Japan very competitive. We are positive on Singapore equities as Singapore emerges from Covid as the preferred financial hub in Asia. China equities lack short term catalysts, but are good long term investment opportunities, as the twin headwinds of zero-Covid policy and property slump would eventually be resolved.

 

Figure 1: S&P500 Index and MSCI ACWI Index

Source: Reuters 26 September 2022, Note: ACWI – All Country World Index

 

CENTRAL BANKS ARE HAWKISH WHICH IS BAD FOR RISK ASSETS

1.The US equities market (and global equities) rallied from the middle of June of this year on expectations that the Federal Reserve (Fed) would pivot to a more dovish monetary stance on peaking inflationary pressures. See figure 1 above. This optimism evaporated with the release of the August US Consumer Price Index (CPI). August US headline CPI rose 8.3% year-on-year and was higher than consensus expectations of 8.1%. Core CPI inflation, which excluded the volatile food and energy components, also rose to 6.2% from 5.9% year-on-year in the previous month.

 

2.  The Federal Open Market Committee (FOMC) showed its resolve to combat inflation by raising the targeted federal funds rate by 75 basis points (bps) at the latest meeting on 21st September. And the Fed’s median dot plot of another 125 bps of rate hike for the remainder of 2022 and another 25 bps in 2023 was more hawkish than in the previous meeting.

 

3.  It was clear from the September FOMC meeting that the Fed wanted to slow the economy further and that they would even allow unemployment rate to rise to 4.4% in 2023. This increases the risk of a recession in the US over the next 12 months, implying a need for earnings estimates in 2023 to be revised lower. This would be a headwind for US equities (and global equities given the correlation) unless inflation slows significantly over the next few months.

 

4. Many countries globally followed the US in raising interest rates and 17 central banks raised rates in the same week as the US in September. We expect global economic growth to slow further as central banks globally continue to tighten. The latest leading economic indicators like the September Eurozone and UK flash composite Purchasing Managers’ Indexes (PMIs) have deteriorated, pointing to weaker economic activities ahead. The risk of a global recession over the next 12 months has increased which would be a headwind for Asian equities too.

 

RISK OF GLOBAL RECESSION HAS ALSO RISEN

Figure 2: Dividend Yields minus Bond Yields for various markets

Source: Reuters 21 September 2022,

Note: DY – Dividend Yield, BY – 10-year Government Bond Yield for respective region

 

5. Bond yields have risen with interest rates and the US 10-year treasury yield reached 4%, a level not seen since 2010. The relative attractiveness of stocks (see figure 2 above) are at its lowest levels in a decade compared to bonds in the US and Europe. Our view is that bond yields are near peaking and that government bonds are relatively attractive compared to equities, which could be vulnerable to further volatility in the near term.

 

CHINA EQUITIES DEPRESSED AND READY TO REBOUND

6. China equities has languished on the twin headwinds of zero-Covid policy and a property slump.

 

7. We are of the view that China would start easing on their zero-Covid policy when they reach the necessary vaccination rate for their elderly population (aged above 60 years old). Studies have shown that Chinese vaccines with a booster shot, have almost identical efficacy to Western mRNA vaccines. As such, the only impediment to a reopening is vaccination rates and it is only a matter of time before China eases on their zero-Covid policy.

 

8. A recovery in the Chinese property market is also a necessary condition for Chinese economy to recover as it is of systemic importance. According to estimates by UBS dated September 2022, China’s property sector accounts for around 25% of China’s GDP, over 50% of household wealth and a third of the local government revenue. Despite two rounds of stimulus including lending rate cuts and RMB200bn of special loan quota for housing delivery in August, housing data is still weak with new home sales falling 23% year-on-year and new starts plunging 46% year-on-year in August. Given the importance of the property market, we expect Chinese policy makers to introduce new rounds of supporting policies if the property market does not show signs of recovery.

 

9. China equities could face short term volatility if new waves of Covid infections lead to more lockdowns across China. But China equities are attractive in the long term as valuations are depressed and the market could rally with the eventual exiting of the zero-Covid policy and stabilisation of the Chinese property sector.

 

JAPAN EQUITIES BENEFITS FROM HISTORICALLY WEAK YEN

Figure 3: Nikkei225 Index and Japanese Yen

Source: Reuters 26 September 2022

10. The Japanese Yen has weakened significantly this year to levels not seen since the 1990s and we expect the Yen to weaken further as long as the Bank of Japan (BoJ) continues with its yield curve control (YCC) policy. We expect the BoJ to maintain this policy till they are confident that long-term inflation stays above 2%, which may not happen in the foreseeable future. As such, our base case would be for the Yen to weaken further though we could see short periods of Yen strength from currency interventions.

11. Japan equities get a tailwind on Yen weakness. See figure 3 above. And Japanese companies could also upgrade their earnings guidance over the next few months as existing currency hedges roll over. A weak Yen would also be a major boost to tourism when Japan finally reopens to tourists in October. We are positive on Japan equities but remind investors to hedge their currency exposure.

 

SINGAPORE AS A QUALITY AND DEFENSIVE PLAY

12. Singapore is a small open economy vulnerable to a slowdown in the global economy. However, the Singapore economy has also become more resilient post-Covid as Singapore is now the preferred financial hub in Asia. This is reflected in the record number of family offices setting up in Singapore. Funds searching for a safe-haven are flowing into Singapore and this could offset the negative drag from a slowing global economy. Singapore equities could be considered defensive during times of volatility.

 

CONCLUSION

13. Current valuations (see figure 4 below) are attractive relative to historical averages and the bearish sentiments allows for a rebound on positive news. However, as explained above, earnings could be revised lower as economic growth slows. Markets with hawkish central banks like the US, Europe and parts of Asia would face headwinds. We have however highlighted three investment opportunities above with i) Japan equities currently enjoying the catalyst of a weak Yen, ii) China equities as a long term investment opportunity due to attractive valuations and iii) Singapore equities as a defensive play.

Figure 4: Consensus earnings forecast strong for this year and next

Source: Thomson Reuters, 23 Sep 2022,

Note: F – Consensus Forecast, x – excluding, P/E – Price to Earnings

 

Download Report

 

Disclaimer

This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. It is for information only, and is not a recommendation, offer or solicitation for the purchase or sale of any capital markets products or investments and does not have regard to your specific investment objectives, financial situation, tax position or needs. Investments in the products mentioned herein are not obligations of, deposits in, guaranteed or insured by LGI or any of its affiliates and are subject to investment risks including the possible loss of the principal amount invested. You may wish to seek advice from a financial adviser before making a commitment to undertake any investment. In the event that you choose not to seek advice from a financial adviser, you should consider carefully whether the investment is suitable for you.

The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. Any opinions, projections or forward-looking statements expressed herein or information presented (which includes estimates, graphs, charts, formulae or devices) is subject to change or correction at any time without notice and is not to be relied on as advice. You are advised to conduct your own independent assessment and investigation of the relevance, accuracy, adequacy and reliability of any information contained herein and seek professional advice on them. No warranty is given and no liability is accepted for any loss arising directly or indirectly as a result of you acting on such information.

References to specific corporations/companies and/or their trademarks are not intended as recommendations to purchase or sell investments in such corporations/companies nor do they directly or indirectly express or imply any sponsorship, affiliation, certification, association, approval, connection or endorsement between any of these corporations/companies and LGI or the products and services of LGI. It should not be assumed that investment in the securities mentioned was or will be profitable.

This publication is not intended for use by any person other than the intended recipient and may not be reproduced, distributed or published without prior written consent of LGI. This publication may not be distributed in any jurisdiction or to any person where such distribution is prohibited (including Canada, Japan, the United States of America) or to US persons (as such term is defined in Regulation S under the US Securities Act of 1933).

©Lion Global Investors® Limited (UEN/ Registration No. 198601745D) is a Singapore incorporated company, and is not related to any asset or fund management entity that is domiciled in Europe or the United States.

Topics

Categories

Share this article

Disclaimer

You will be leaving this website and will be redirected to a third party website. Please note that the 3rd party site is independent of this website. Lion Global Investors Limited makes no representations, accepts no responsibility for the content, security and privacy policies or the use of the 3rd party site or for that of subsequent links and shall not be liable for any loss or damages caused or alleged to be caused by or in connection with the use of or reliance on any such content, goods or services available on or through the 3rd party site or its subsequent links.

If you do not wish to continue to the 3rd party site, click Close or use the Back button on your web browser.

Disclaimer

You will be leaving this website and will be redirected to a third party website. Please note that the 3rd party site is independent of this website. Lion Global Investors Limited makes no representations, accepts no responsibility for the content, security and privacy policies or the use of the 3rd party site or for that of subsequent links and shall not be liable for any loss or damages caused or alleged to be caused by or in connection with the use of or reliance on any such content, goods or services available on or through the 3rd party site or its subsequent links.

If you do not wish to continue to the 3rd party site, click Close or use the Back button on your web browser.

Comparing the TER cost for 20 years

Here’s the difference a low cost advantage makes to cost savings

Here's how much you pay

$190,272.13
Selected TER 1.00% p.a.

$99,912.57
LionGlobal All Seasons Fund 0.5% p.a.

By investing a fund with low TER

You may save $90,359.56 over 20 years based on an initial investment of $1,000,000 compared with a TER of 0.5% p.a.

It is enough to provide for a monthly expenditure of $3,000 over the next 2 years and 6 months.

Here's how much you pay

$271,950.61
Selected TER 1.50% p.a.

$99,912.57
LionGlobal All Seasons Fund 0.5% p.a.

By investing a fund with low TER

You may save $172,038.04 over 20 years based on an initial investment of $1,000,000 compared with a TER of 0.5% p.a.

It is enough to provide for a monthly expenditure of $3,000 over the next 4 years and 9 months.

Here's how much you pay

$345,744.19
Selected TER 2.00% p.a.

$99,912.57
LionGlobal All Seasons Fund 0.5% p.a.

By investing a fund with low TER

You may save $ 245,831.62 over 20 years based on an initial investment of $1,000,000 compared with a TER of 0.5% p.a.

It is enough to provide for a monthly expenditure of $3,000 over the next 6 years and 9 months.

TER (Total Expense Ratio) is the sum of various identified operating expenses charged on an ongoing basis to the fund’s assets as a percentage of the fund’s average net asset value calculated over a 12-month period at the close of the annual and semi-annual financial statements of the fund for all the p.a. tabs (1.0%, 1.5%, 2.0%).

The above scenarios are for illustration purpose only. Past performance, as well as any prediction, projection or forecast on the economy, securities market or the economic trends of the markets are not necessarily indicative of the future or likely performance of the funds. Calculations based purely on costs with no market movement or investment returns.