Harris Fraser |
Research Insights
18 March, 2022
Japan – Looking for More Policy Support

Japanese equities fell in line with the global markets, but the correction was less severe as the country is starting to move past COVID.  Over the month of February, the Nikkei 225 and TOPIX lost 1.76% (1.74% in US$ terms) and 0.47% (0.46% in US$ terms) respectively.

Overall, the Japanese economy is still relatively fragile, fundamentals are mixed, and there is limited positive news on the market. Unless there is a significant shift in policy, we expect this to remain the norm in the short term. The biggest support could come from the government, as the government is starting its slow but gradual shift towards living with COVID. Although tourists are still excluded from the reopening at the moment, allowing foreigners through the borders is a good sign that tourism will eventually recover, which would support the battered service sectors in the country. 
Inflation also continues to be the bright spot, the much lower figure than the global average, which is even lower than that of the Bank of Japan’s long term target, allows the current loose monetary policy to be maintained. This is a gives the Japan market an advantage over other major equity markets as valuations are expected to stay at the current elevated levels, but this advantage is somewhat nullified by the weaker base line. Unless there is any material change to the economy itself, we shall remain neutral on the Japan market for the year.
 

Research Insights
17 March, 2022
EM – Cautious on the Outlook

EM equities continued to slide in February. While southern Asian and Latin American equity markets had a decent month, the negative shocks arising from the Russo-Ukraine conflicts rippled across other markets. Russian equities saw an over 30% crash in value as other parties rush to cut their Russian ties. Over the month, MSCI emerging markets index lost 3.06%.

Fears of supply shocks in various commodities drove prices higher, commodities exporters other than Russia were able to post gains amidst the volatility. With sanctions imposed on several key entities, energy supply is facing potential jeopardy. With short term shortfall in supply expected, energy prices could remain at elevated levels in the short to medium term, inflation would linger. This could act as headwinds for the market, as it pushes for a tighter monetary policy from central banks, which in turn likely hurts the economy. 


At the moment, we are still cautious on EM equities, as the risk factors remain in place. A less than ideal vaccination level leading to more COVID disruption to the economy; softer economic fundamentals as reflected by the leading indicators; strong US Dollar and inflation leading to capital outflows. These together bundled with the uncertainties surrounding the military conflict paints a rather bleak picture for emerging markets, as capital generally prefer DM equities and fixed income during periods of risk aversion. As of now, we are only selectively positive on China and Southeast Asia markets, mainly due to their relatively healthier economic fundamentals.
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Research Insights
16 March, 2022
Europe – The Inflation Dilemma

European markets were shaken as geopolitical tensions in Ukraine rose. With the energy crisis potentially intensifying due to the ongoing Russo-Ukrainian conflicts, and the numerous subsequent sanctions on Russia, high inflation is likely going to persist. With market sentiment worsened, the European STOXX 600 index fell 3.36% (3.46% in US$ terms) in February.

The Russo-Ukrainian conflict continued, peace talks have not resulted in any meaningful progress. In response, western nations have imposed a fresh round of sanctions against Russian entities, targets included a number of banks and other key institutions, which is expected to cause great damage to the Russian economy. Due to the ongoing conflict and sanctions, expect crude oil supply to tighten, which could further push up energy prices, especially in Europe where there is more reliance on the Russian supply, inflation could remain elevated in Europe.


As a result, this could possibly impact the ECB monetary policy. Originally, given the relatively persistent high inflation, the ECB is expected to tighten its monetary policy over the year, cutting down on the scale of quantitative easing, alongside a number of rate hikes. While the higher level of inflation is almost a given fact at this moment, uncertainty surrounding the situation in Ukraine could delay the expected tightening in a bid to relieve short term liquidity squeezes in the market. However, fundamentals are expected to stay weaker do to the external circumstances, and we remain less positive on the European equity outlook before the 2 main risk factors fade out.
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Research Insights
15 March, 2022
China – Stability First and Foremost

A-shares were less affected by the external markets and bounced back from January losses. That said, headwinds still remain, economic fundamentals are soft, and policy uncertainty has not completely dissipated.

Over the month of February, CSI 300 Index edged 0.39% higher (1.22% in US$ terms), whereas the Hang Seng Index fell in line with external markets, losing 4.58% (4.78% in US$ terms).


Chinese economy is still on the soft side, as leading indicators have showed. While signals from the politburo have indicated that there should be more support coming from both fiscal and monetary sides, concerns over the real estate market remains. That said, we are still optimistic on the policy outlook, even though the overall economic growth might slow down, as we believe that the authorities’ repeated emphasis on ‘stability’ should still be the overarching policy doctrine for the year, which should reduce chances of any disastrous market crash.


For the outlook of the year, our views on the sectors has not really changed materially, as we are still positive on the selected few sectors, namely new energy and technology related sectors. The renewables related sector should see continued policy support as China continue to move towards its carbon neutral target. Whereas the technology sectors are expected to see valuation recovery as they have good fundamentals and have relatively cheap valuations at the moment. Overall, we are still leaning towards a positive outlook on the Chinese market for the year, as loosening policy stranglehold in the market should help with equity valuation recovery.
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Research Insights
14 March, 2022
US – Hold Your Horses

The US market saw some wild swings towards the end of February, as tensions in Ukraine mounted. Prospects of inflation staying higher for longer further hit market sentiment. US equities remained under pressure, the Dow, S&P 500, and the NASDAQ fell 3.53%, 3.14%, and 3.43%.

Pandemic concerns are almost completely out of the picture in the US market, the economic activity is moving back to the pre-COVID levels. However, the situation in Ukraine threw the markets off guard, with concerns over energy security and the conflict itself hitting sentiment, the freshly imposed round of sanctions would likely further worsen the supply chains woes. With limited ways out of the situation in the short term, expect elevated near term market volatility, uncertainties remain for the outlook of the market.


The monetary policy outlook also provides no help to the market. Although the situation in Ukraine could result in a slower tightening pace for global central banks, with the US is still facing one of the highest levels of inflation in recent decades, we do not expect any material change to Fed’s monetary policy direction, tightening is still the name of the game, we still expect more pressure onto equity valuations. In the short term, with the 2 major risk factors in play, we have reservations on the US market, and would advise against increasing exposure before the dust settles.
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Research Insights
11 March, 2022
Weekly Insight March 11

Weekly Insight March 11

  usaUS

The rebound in the global stock market was initially strong when Ukrainian President Volodymyr Zelenskyy said he would not insist on joining NATO, but then the lack of significant progress in the Russo-Ukrainian talks, coupled with the continued high energy prices and the heightened fears of an impending recession in the US, weighed on the US stock market, with the Dow, S&P, and Nasdaq falling between 1.84% and 3.01% over the past 5 days ending Thursday. As for the ongoing conflict, the Russian army is still stepping up its attacks on the Ukrainian capital Kiev, no substantive consensus has been reached in the foreign ministerial talks between the two, and the sanctions imposed by the West on the Russian side are still in place.


While the situation in Ukraine and Russia is still ongoing, worries about the US economic outlook are mounting as the US Federal Reserve's rate hike expectations for March have markedly cooled. According to Bloomberg interest rate futures data, the expected rate hike in March has been reduced to 25 basis points from 50 basis points, possibly suggesting that the escalation in the Russo-Ukraine situation is considered a constraint on the Fed's policy tightening. As a reference, the 10/2 year US Treasury spread, which has been an accurate predictor of US recessions in the past, has now fallen to a lower level of around 28 basis points, which may mean that the US could soon be at risk of another recession. The US Federal Reserve will meet on 16th March and the market is already expecting one rate hike. The focus will be on the post-meeting statement and Chairman Jerome Powell's comments on inflation and tapering. The retail sales data for February will also be released next week.
 

euroEurope

Although European stocks briefly rebounded as the situation in Russia and Ukraine eased, the region still posted losses over the past five days ending Thursday, with the UK, French, and German equities posting cumulative losses ranging from 1.87% to 2.68%. The European Central Bank kept interest rates unchanged after its interest rate meeting, but unexpectedly announced an accelerated exit from their accommodative policy. President Christine Lagarde said that with inflation expected to rise further and the economic environment highly uncertain, asset purchases would cease by the third quarter of the year unless the medium-term outlook has changed. Markets will continue to monitor the central bank policy and the European economy, while Germany will release data including the ZEW economic sentiment index next week.

chinaChina

In addition to the continued escalation of the Russo-Ukraine situation, China stocks listed in Hong Kong and the US were further weighed down by US regulatory news, which saw the Hang Seng Index testing the 20,000 level again, while the China A-share market remained weak over the past week. The SEC released a list of five Chinese companies during US market hours on Thursday, stating that these companies would be required to provide evidence to refute the decision to delist, triggering a sharp drop of the China concept stocks in the US market, which later extended to the same segment in the Hong Kong stock market. As for the two sessions, Premier Li Keqiang said in response to a reporter's question that China's economy had grown to more than RMB110 trillion last year, and that the current growth was on top of a high base, and that it would be a big challenge for such a huge economy to maintain a medium-to-high speed of growth. Next week, China will be releasing key figures on fixed investment, industrial production, and retail sales in February.

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Research Insights
4 March, 2022
Weekly Insight March 4

Weekly Insight March 4

  usaUS

The war between Russia and Ukraine continued into the second week, the Russian offensive showed no sign of slowing down, and there was no visible progress in the ceasefire negotiations. However, market expects rate hikes from the US Federal Reserve to be milder, fuelling a rally in the US stock market, as the three major indices rose by between 0.48% and 1.74% over the past five days ending Thursday.  Despite greater gains in the south, Russian forces are making slow progress in northern Ukraine. The two sides have now reached an agreement in the second round of talks on the evacuation of civilians and other issues, and will continue to negotiate.


During this period, many Western countries have stepped up their sanctions against Russia, with the White House announcing a ban on US individuals and companies from doing business with the Russian central bank, the Russian National Wealth Fund, and its Ministry of Finance. The EU has reportedly agreed to ban seven Russian banks from using SWIFT, but the number one bank Sberbank and Gazprombank are off the hook for the time being.


US Federal Reserve Chairman Jerome Powell expressed support for a 25 basis point rate hike in March and remained open to a 50 basis point hike in the future, noting that the US economy was strong enough to withstand a faster pace in rate hikes. However, he reiterated that the Russian invasion of Ukraine has created both inflationary and economic risks, suggesting that the Fed would take a "cautious" approach when raising interest rates. Next week, US will release CPI data and the University of Michigan market sentiment.
 

euroEurope

The Russo-Ukrainian conflict continues, rising oil prices, and increased Western economic sanctions against Russia are three factors weighing on the European economic outlook, with European equities underperforming the rest of the world. Over the past five days ending Thursday, the UK, France, and German indices fell between 3.35% and 5.96%. The ECB's chief economist said the central bank is closely monitoring the economic impact of the Russo-Ukrainian war and will use all necessary measures to support the economy when the situation becomes clearer. According to the latest ECB meeting minutes, officials believe that the geopolitical situation increases inflationary pressure, and that if the surge in energy prices continues, inflation will surpass expectations in the coming months. The ECB will hold an interest rate meeting on 10th March.

chinaChina

On Friday, reports of explosions near Europe's largest nuclear power station raised fears of an escalating war, Asian stocks were down for the day, the Hang Seng Index fell 2.5% on Friday, extending its weekly loss to 3.79%; the Hang Seng Technology Index fell 7.33% over the week, while the CSI 300 Index also shed 1.68% over the week. China's official manufacturing and non-manufacturing indices both improved in February compared to the previous month. Sectors such as oil and resource companies gained on the back of higher energy and raw material prices. Next week, China will release CPI and PPI figures for February.

 

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Research Insights
25 February, 2022
Weekly Insight February 25

Weekly Insight February 25

  usaUS

Tensions in Ukraine escalated, and it was later reported that Russia began military operation in Ukraine, impacting the global investment market, Asian equities fell across the board on Thursday; the S&P 500 was down 2.62% at one point, the NASDAQ down 3.45% and the Dow down 859 points, after which the three major indices rebounded later in the session. Still, the three indices were still down between 4.16% and 4.90% over the past 5 days ending Thursday.
After Russian President Vladimir Putin recognised the independence of the two regions of eastern Ukraine and dispatched "peacekeepers" to those regions, he then authorised a special military operation to the Donbass region. The Ukrainian capital, Kiev, was hit by a series of missile attacks on military facilities, with the Ukrainian army claiming that its forces had shot down Russian jets and helicopters, which Russia denied. Russians also denied attacking Ukrainian towns, stressing that they only targeted military facilities and air defence systems. In response to the incident, a number of Western countries, including the US, imposed a new round of sanctions on Russia.
As for the interest rate policy, some Fed officials acknowledged the risks associated with the war between Russia and Ukraine, but also stressed the need to address high inflation, with Fed Governor Michelle Bowman expressing support for a rate hike in March, and not ruling out the possibility of a 50 basis point hike. The next Fed meeting will be held on 16-17 March, while the US will release data including ISM manufacturing index, non-farm payrolls, and the Fed Beige Book next week.
 

euroEurope

On Thursday, reports that Russia had officially authorised a special military operation against Ukraine, coupled with the announcement of increased sanctions against Russia, led to an intraday fall of over 50% in the RTS index, before narrowing its loss to 38.3% at market close. Apart from Russia, major European stock markets in proximity to Ukraine were also affected, the DAX, CAC, and FTSE 100 indices also lost between 3.83% and 3.96% over the day. As the geopolitical situation in Eastern Europe escalated, some ECB officials said that the pace of the exit of its stimulus measures might be slowed down, while Bank of England Governor Andrew Bailey said that the planned tapering might be suspended during the market turmoil. Next week, the Eurozone will release the Consumer Price Index (CPI) for February.

chinaChina

Hong Kong equities fell sharply this week and wiped out the gains made so far this year, with the Hang Seng Index down 6.41% for the week and down 2.69% YTD, while the CSI 300 Index fell 1.67% for the week and extended its YTD losses to 7.43%.  Recently, the focus has been on the situation in Ukraine, sending the price of commodities such as gold and oil up, and the market is mostly speculating on sectors that benefit from the rising gold and oil prices, related sectors are performing well, the market will continue to pay attention to the situation in Ukraine. Next week, China will release the Official and Caixin Manufacturing PMI data.

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Research Insights
24 February, 2022
Fixed income – Pressured by Tight Monetary Landscape

Inflationary pressures remain, together with both forms of monetary tightening (rate hikes & tapering) threatening fixed income market performance. 

Over the month of January, the Bloomberg Barclays Global Aggregate, US Investment Grades, US High Yields, and Emerging Markets US Dollar Bonds down 2.05%, 3.37%, 2.73%, and 2.63% respectively.


Inflation in both Europe and the US continue to set record highs in recent years. Henceforth, in order to reign in the runaway inflation, Fed president Jerome Powell mentioned that tapering could start within the year, which would put more pressure on asset prices due to the reducing liquidity. As for the ECB, they have seemingly shifted their stance on the inflation outlook and monetary policy. Concerned about the high inflation, the ECB announced a reduction of asset purchases over the year. The turnaround was unexpected and puts pressure onto the bond market.


The elevated inflation was one of the main reasons for the tightening policy, which was caused by a myriad of factors. The ongoing energy crisis, supply and demand imbalance in general, and the lingering supply chain problems further adds fuel to the fire. With continued tightening expected, fixed income as an asset class this year is expected to underperform. If one still has to invest in fixed income, we will continue to propose prioritising high yields for their shorter duration and higher carry. We see Asian bonds in particular as a unique investment opportunity, as the loosening monetary in the region could lift the market in 2022.
 

Research Insights
23 February, 2022
Japan – Moving on to post-COVID

The Japanese equity market performed in line with global markets, concerns over global monetary policy tightening and higher geopolitical tensions all contributed to the weaker market sentiment. Over the month of January, the Nikkei 225 lost 6.22% (6.18% in US$ terms), while the TOPIX also ended 4.84% lower (4.80% in US$ terms).

COVID showed no signs of easing in the country, as daily infected figures continue to climb, despite a flurry of countermeasures dedicated to limit the spread. As of late, the government have finally started to shift its position on the pandemic restrictions, announcing reopening its borders, which could hopefully relief some of the pressure on badly hit sectors of travel, hospitality, and services in general. This could mark the start of the transition from a low tolerance policy to the coexistence one, which should also help lift the corporate earnings forecast in the market.
That said, economy itself remains relatively weak, leading indicators are still mixed at best, confidence indices are less positive. However, the key item of inflation in Japan is still far lower than the global average. This could give the market an edge as the central bank is expected to keep the loose monetary policy unchanged, which prevents a significant valuation compression. These should keep the market afloat despite the weaker fundamentals. We stay neutral on the market for the whole year.
 

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