Maintaining portfolio resilience amidst volatility - Asia Investment Outlook H2 2022
Over the first half of 2022, the repricing of future monetary rates has been extraordinary, brutal and global, reflecting the swing in the Fed's and other central banks' guidance. This repricing may not be finished yet. While close to a peak in the US, inflation will be slow to reverse there, and should continue to accelerate elsewhere through the summer.
With Fed funds rates expected above 3% by year end, and money conditions restricting almost everywhere, the odds for a contraction in earnings and GDP have increased very significantly. Activity in developed economies, surprisingly resilient in the first half of 2022, is now showing obvious signs of vulnerability.
A recession is coming in the US and in Europe. Markets may have priced it partially but central banks may deliberately ignore it, especially if inflation and labour markets are too slow to cool down. Credit spreads would keep on widening and stock multiples would continue to compress until an ultimate capitulation, threatening overall financial stability and forcing central banks to reverse their policies.
Read more about portfolio agility, inflation and growth scares
China is in a different position. Its growth was choked last year due to excessively restrictive macro and regulatory policies, and weakened further in 2022 as a result of the containment of Omicron outbreaks. With youth unemployment already at record levels, China's authorities have no alternative other than to implement the Zero-Covid strategy in a more pragmatic way, while massively reflating domestic demand.
It is too early to bet on a rapid recovery of global risky assets. Securing portfolio resilience remains a more relevant strategy than buying the dips for the time being. The best hedges for the second half of 2022 might however be different from the ones that prevailed over the first half.
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Indeed, as growth concerns dominate progressively over inflation, those that benefitted from the commodities cycle or the post-Delta re-opening are at risk of returning part of their recent strong outperformance. These include cyclical commodities, value stocks and emerging assets.
Symmetrically, long-dated sovereign bonds may have regained their safe haven status, while flight to (extreme) quality should intensify further in credit markets.
China's onshore markets have rebounded significantly since late April, reflecting improving activity conditions and strengthening momentum in policy support. Even under our shallow recovery assumptions, we believe there is space for similar returns within the next few months, quite insulated from the volatility in global markets.
