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Five insights in five minutes

Five in Five: Asia rates, equity, China high dividend, inflation, ESG
14 January 2022

    Asian rates

    What are policy rates going to do in Asia – both in absolute terms but also relative to America? Sure you need to read our strategists, as well as your favourite tea leaves. But it’s also critical to understand what markets are thinking. For example, using Bloomberg data to deconstruct market and neutral yield curves suggests higher rates almost across the board in 2022. Indeed, New Zealand and India’s central banks are predicted to tighten the most – by 150 basis points. That’s a punchy call given omicron. Meanwhile Malaysia is the one country where fixed income investors have priced in policy loosening before December. And, as shown by the black bars in the chart below, almost all Asian markets are discounting that rates will tighten by more than in the US next year too (the Federal Reserve is assumed to hike another 50 basis points). Japan and Malaysia are the only exceptions. A relatively bullish outlook for Asian growth then, all considered.

    Conversation starter for… Asia fixed income, Asia high yield, emerging market fixed income

    Asian rates   For illustrative purpose only. 

    Equities

    Stocks started the year mostly in the red, with the US underperforming much of the world as tech and growth stocks sold off, per the chart below. While the early head start for lower valued stocks matches our strategists’ preference for markets primed for catch-up, we don’t suggest bailing on American companies. Historically, the start of the year has been a poor indicator of what is to come for investment markets. For instance, since the global financial crisis, the average MSCI World return to the end of the year following a negative first seven trading days has been nearly 11 per cent, edging out the index performance after a positive first seven trading days. And only twice has the S&P 500 delivered negative returns from now to the end of the year – in both instances that index was green at this point. The takeaway? Don’t worry about week one too much. Focus on real investment drivers, such as earnings or Elon Musk’s tweets.

    Conversation starter for… global equities, US equities

    Equities   For illustrative purpose only. 

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    China high dividend

    Although the romantic notion that the two words ‘crisis’ and ‘opportunity’ are combined together in the Chinese language is in fact a mistake of translation, it is an apt description of the country’s equity market today. Certainly 2021 felt like a crisis at times, with Chinese stocks losing a fifth of their value amidst an internet sell-off. But the resulting pessimism has given rise to some attractive dividend opportunities in sectors that are very much unrelated to real and perceived regulatory risks. For example, banking, insurance, and oil and gas are large industries that together make up 15 per cent of the MSCI China index. Their current dividend yields are 5.7, 5.0 and 8.2 per cent respectively. Nice. And with all three having price-to-books below one and price-to-earnings ratios in single digits, even the most pedantic scholars of the Chinese language may want to update their portfolios.

    Conversation starter for… Chinese equities, Asian equities

    China high dividend   For illustrative purpose only. 

    Inflation

    The US has just released some of the highest inflation readings in decades, with investors wondering what it all means. Our multi-asset research team has crunched some interesting numbers. Based on twelve-month US consumer price inflation, they partitioned 24 years of asset class performance data into two inflation regimes: moderate, for periods where CPI was between 1.8 and 2.6 per cent and high, when it fluctuated between 2.6 and 5.3 per cent. As illustrated below, during both regimes, most asset classes exhibited positive annual returns, even adjusted for inflation. If global equities and high yield strongly benefited from moderate inflation periods, they suffered more in periods of higher inflation. Note that emerging market debt performed well in both environments, while alternatives demonstrated why they are a good substitute for conventional asset classes in high inflation regimes. Although history might not repeat itself, such an analysis reminds us of why diversification and active management are so important.

    Conversation starter for… global equities, emerging market debt, high yield, multi-asset

    Inflation   For illustrative purpose only. 

    ESG in 2022

    Great sustainable strides have been made in the past decade, with 63 stock exchanges publishing ESG guidance according to the Sustainable Stock Exchanges initiative, up from just two in 2011. But this is only half the world’s bourses monitored by the SSE. What are indicators of further ESG advancement? Disclosure and biodiversity are a good start. The former looks set to improve rapidly, from Europe’s Sustainable Finance Disclosure Regulation to recently-issued Saudi ESG guidelines and Egypt’s mandatory disclosures. Meanwhile, pending standards from the likes of the International Financial Reporting Standards Foundation will serve to encourage ESG data convergence. Given the rapid loss of natural carbon sinks that absorb 40 per cent of carbon emissions, also watch out for the second part of COP 15 next quarter that will review biodiversity targets, and frameworks under the Taskforce on Nature-related Financial Disclosures. With all these initiatives, investors and the financial community play a vital role in their implementation and success.

    Conversation starter for… ESG strategies, natural capital, Paris aligned ETFs

    ESG in 2022   For illustrative purpose only. 


     


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