Finding opportunities in an environment of rising inflationary risk and growth concerns

Unlike 2021 where equities rose and fixed income declined, 2022 has so far witnessed much volatility across both asset classes. The reasons for such an environment are not only because of geopolitical tensions and inflationary risk, but also rising investor concerns over potential recession as the peak of growth momentum seems to be behind us.

In the case of equities, we believe that uncertainties around earnings may not have been fully reflected in valuations while discount rates are at best stable, making the asset class less attractive. Elsewhere, our cyclical models are pointing to a shift into the "slowdown" phase which is typically the most challenging phase of the cycle for equities. Nonetheless, we do find bright spots within equities, particularly in China, where the country looks to be turning a corner on lockdowns, and that should in turn, ease some of the supply bottleneck pressure. To add on, the headwinds from regulatory actions on the tech sector, property curbs and monetary policy are showing signs of easing. As such, we have started to turn more positive on China.

Moving onto fixed income, the market has experienced a significant sell-off this year. We maintain our neutral view on bonds. Looking at previous “slowdown” phases, bonds typically start to perform well as investors adjust to a weaker growth outlook. The challenge this time round is that, with inflationary pressure set to remain high, we are unlikely to get a reversal in monetary policy over a short period of time, meaning that investors require higher yields to compensate them for the potential volatility. With the market expecting global central banks to be more aggressive in raising interest rates and tightening liquidity to bring down inflation, we are staying cautious on bond duration to minimise the impact from changes in interest rates.

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