As we continue to battle on with Coronavirus, where can investors find opportunities amidst the uncertainties? Looking at the macro backdrop, we are currently in the recovery phase, however, as growth momentum peaks and central banks begin to withdraw support, we are now approaching a more mature phase of the cycle. Growth is still positive, yet we expect growth to cool down after an exceptionally strong year in 2021 as the support offered by governments and central banks at the start of the pandemic begins to fade. In terms of fiscal policies, we are already seeing government spending and loose taxation policies being wound down in certain developed markets.
Inflation has been on the headlines throughout 2021, and should continue to be the case for 2022. We are likely to be in a more inflationary environment compared to the last decade, driven by rising wages, deglobalisation and decarbonisation. Whilst there may be a possibility for supply chain bottleneck to ease in the short term, this is unlikely to stop key central banks to raise rate in 2022.
Against this backdrop, we expect equity returns to be positive but more moderate in 2022 whilst fixed income remains to be the asset class that we are less positive on. Specifically, we believe investors should look for companies that have higher pricing power so that profits won’t be eroded because of higher input costs and wages. Interestingly, while the developed markets are focused on policy normalisation, we expect Chinese policy to be easing this year. This should be supportive to the equities market together with the fair valuation, however, short-term moderation in growth, tightening of credit supply and heightened standards of regulations remain headwinds for the market. In short, fundamental stock selection will continue to be paramount for this market.
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