Five insights in five minutes
China’s RRR cut
So what to make of the People’s Bank of China’s Monday announcement of a 50 basis-point cut in the reserve requirement ratio? To paraphrase the central bank’s own words, it has no intention of blasting the economy with a fire hose, but is instead loosening the taps just ‘slightly’ (releasing USD188 billion) to make sure there is enough liquidity to foster steady economic growth. The chart below shows that historically a RRR cut – reducing the proportion of cash that financial institutions are required to deposit with the PBOC – tends to bring about modest short-term gains for China’s equity market. And modest it is this time as well, with the CSI 300 advancing three-fifths of one per cent in the trading session subsequent to the announcement. Although investors may be disappointed that China won’t pursue quantitative easing-style measures to prop up the stock and bond prices any time soon, the recent RRR cut is certainly a sign that mild monetary easing is well in order if the state of the economy calls for it.
Conversation starter for… China/Asia equity and fixed income, emerging marketsFor illustrative purpose only.
Europe equity outlook
Forget just New Year’s Eve, European equities may give us reason to celebrate well into next year. As our just-published 2022 Outlook explains, Europe is one of the developed markets least exposed to monetary tightening risk. What is more, €800 billion of funding from the European Recovery Fund, along with a new growth-supportive coalition government in Germany, means an economic boost is coming. More granularly, a possible push into positive ten-year German bond yield territory (through inflationary pressures, cautious exits from emergency measures and knock-on effects) would be good news for value sectors such as banks, energy and construction. Take the chart beneath for example, highlighting growth’s outperformance over value since the financial crisis, versus the ten-year German bond yield. With the exception of the rebound in yields following the panic sell-off last March, growth has consistently outperformed when yields declined, and underperformed when yields rose – regardless of bull or bear markets.
Conversation starter for… European equitiesFor illustrative purpose only.
As stressed by recent headlines, the hedge fund industry has just suffered its worst monthly performance since March 2020. The HFRI fund weighted composite index fell by more than two per cent in November. But hang on, some perspective is needed. The resilience and diversification benefits of the asset class remain clear, with the index still up a solid 34 per cent over the past three years. What is worth remembering, however, is that some hedge fund strategies are more correlated to bond and equity markets than others. As illustrated below, the dispersion across hedge fund styles is wide. For example, equity strategies have tended to perform four times better than their macro discretionary peers so far this year. In addition, there is also a significant dispersion of outcomes within each strategy. Regardless of which economic scenario comes to fruition next year, hedge funds will have an important role to play in investors’ allocations. And a multi-style and multi-manager approach seems a valid option to navigate fast-changing market conditions.
Conversation starter for… alternative investments, fund of hedge fundsFor illustrative purpose only.
Last Thursday, while we were distracted by Omicron and Ben Affleck’s “beautiful” reconnection with J-Lo, potentially game changing new regulations on the foreign issuance of bonds in China’s domestic yuan market were announced by the People’s Bank of China and the State Administration of Foreign Exchange. Overseas companies will be able to raise funds in China and then decide whether to use the proceeds locally or whisk them out of the country. In other words, China’s USD7 trillion corporate debt market is close to becoming truly international. Hence why regulators also allowed for the use of currency derivatives to manage exchange rate risk. Everyone wins. Global issuers will come knowing the pull of higher real interest rates on demand (see chart below). Local investors get more credits to choose from, while the market healthily diversifies. Today, roughly two thirds of issuers are financial companies, compared with 15 per cent in America. Finally, capital inflows should also increase, which will boost the yuan’s reserve currency status.
Conversation starter for… Chinese fixed income, Asia credit, Asia fixed incomeFor illustrative purpose only.
When banks restrained their financing activity after the global financial crisis, companies had to look for alternative sources of funding, leading to a boost in private debt markets. Now the asset class is becoming mainstream. As illustrated below, assets invested in private debt are anticipated to reach USD1.4 trillion by 2025. Direct lending is leading the charge, currently representing more than half of the entire asset class. During the last quarter only, direct lending funds raised nearly USD30 billion, constituting more than two-thirds of total flows into private debt. The fact that direct lending funds exhibit an internal-rate-of-return above five per cent over three years certainly contributed to the surge. Looking ahead, investor appetite for yield shouldn’t vanish, neither should their willingness to sacrifice liquidity to find some. Additionally, per our 2022 Outlook just published, with expectation of interest rates biased to the upside, even as inflation will likely subside later in the year, the floating rates available within private debt make it even more attractive.
Conversation starter for… alternative investments, fixed incomeFor illustrative purpose only.
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