A better tomorrow — recovery, reversal and redistribution

A better tomorrow — recovery, reversal and redistribution
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The global economy has enjoyed a substantial recovery over the course of 2021, as the world continues to adapt to living with Covid-19. With pandemic fears gradually easing and governments scaling back lockdown measures globally, we are cautiously optimistic on the prospects for the new year — although the markets may prove to be bumpy and volatile, caught in the crosswinds of interest rate hikes, recovery in the global economy and sporadic outbreaks of new variants of the Covid-19 virus.

An endemic world — recovery in progress

Barring any major unforeseen developments, such as a vaccine-resistant strain of Covid-19, we believe that 2022 is the year when the world will finally begin to rebuild itself from the pandemic, and society learns to coexist with the virus for the foreseeable future in a “new normal” scenario, rather than treating it as a one-off threat that can be fully eradicated.

The unpredictability of the virus is best evident with the discovery of the Omicron strain in November 2021. Compared with other variants, this heavily mutated strain is far more transmissible and has a stronger ability to evade immunity from past infections or vaccinations.

Yet, while Omicron has proved to be more transmissible than other variants, initial studies have shown that it is less severe, with many infected people displaying few or no symptoms and a lower rate of hospitalisations and deaths. Existing vaccines have also shown to be quite effective in preventing hospitalisations and serious symptoms, especially with a booster shot. Therefore, we believe that — provided governments globally react with appropriate urgency — the overall impact of Omicron would be quite manageable.

Omicron also revealed the waning efficacy of existing Covid-19 vaccines, raising awareness of the need for a third dose. As such, most developed countries have started to accelerate the rollout of booster shots for their populations.

We are hopeful that, as governments get more adept at containing the spread of the virus and with the discovery of better treatments for the symptoms, the negative impacts of Covid-19 variants can be controlled. We foresee a new normal where pre-pandemic activities will be allowed to resume over the course of 2022, albeit with restrictions in place and temporary measures enacted whenever there is an outbreak.

Riding the China wave — reversal of poor 2021 performance

With rising core inflation and expectations that economies will continue to grow in the first half of 2022, central banks across the world will be more inclined to tighten monetary policy sooner rather than later, with one key exception — China.

Instead of tapering and shrinking liquidity in the financial system, China has stressed its commitment to maintain “growth stability” as the top priority for 2022. The country has embarked on an expansionary monetary and fiscal exercise — evident during the unexpected reserve requirement ratio (RRR) cut announced on Dec 6, 2021, which reduced the proportion of money that lenders must hold and pumped in money to stimulate the economy. Furthermore, the tone from the Politburo of the Chinese Communist Party has turned more dovish and emphasised that “stability is the top priority”. The language from the Chinese leadership has hinted that macro policy will turn more supportive in 2022.

Thus, we anticipate more policy easing — albeit modestly — and expect the Politburo to move from its stance of regulatory tightening to supporting growth throughout 2022. Fiscally, there will be more stimulus measures, and we do expect a slight increase in the budget deficit in 2022. We also expect property measures to be less tight, including easier mortgage loans to homeowners and developer loans to real estate companies.

To achieve its stated goal of “Common Prosperity”, Beijing took drastic action on its property bubble, clamped down on its thriving for-profit education sector, imposed strict restrictions on games and entertainment, and made it more difficult for its companies to access foreign capital. This resulted in a sharp decline of the Chinese stock market in 2021. Investors are rightfully concerned that 2022 will be a second consecutive year of crackdowns, but we believe that the recent posturing from the Politburo signals the tail end of the tough regulatory crackdowns of last year and that the enhanced macroeconomic policy measures bode well for the future.

As part of the government’s efforts to keep a closer eye on its corporate giants and to reduce foreign dependency, the government has also made it more difficult for its companies to list overseas. Chinese companies seeking to list abroad will now be required to register with the Chinese securities regulator and be subject to further scrutiny. Separately, Chinese companies already listed on US stock exchanges are also under increasing scrutiny by US regulators. While this has dampened investor sentiment, we believe these fears are unfounded. Our view is that any delisting of the American depositary receipts (ADRs) will be two to three years away — a lifetime in investment terms. Most importantly, many of the internet ADR giants already have a secondary listing in Hong Kong, or are in the process of getting one. We also believe that the Chinese and Hong Kong exchanges will be more than happy to help these China ADRs transition their listing from the US to Chinese and Hong Kong exchanges.

In addition, we believe that 2022 will mark the gradual change of China’s stringent “Zero Covid” policy. While the rest of the world has learnt to live alongside the virus since last year, China has doubled down on ensuring that the country remains Covid-19 free, with harsh mobility restrictions and immediate local lockdowns implemented upon any outbreaks.

However, with more than 80% of its population vaccinated, we are hopeful that China will relax some of its measures by late 2022, which invariably will stimulate the domestic economy and boost consumption.

Sustainability shift: Redistribution — tackling inequality

The Covid-19 pandemic has exposed significant flaws in existing infrastructure, systems and supply chains. But this has also been a blessing in disguise, as it has directly accelerated the acceptance of green investment themes, widespread adoption of innovative technology and a marked change in consumer behaviour. This brings forth new and interesting investing themes for 2022 and beyond.

The focus shift to sustainability will take centre stage in a post-pandemic world. China has pledged to reach carbon peak by 2030 and carbon neutrality by 2060, and the country’s decarbonisation efforts will present attractive investment opportunities, especially in the green energy and electric vehicle (EV) space.

Among renewables, solar is expected to grow the fastest — it has become a viable replacement for fossil fuels due to the 90% decrease in generation costs over the past decade. Solar projects are economically feasible, as the cost of generation is equal to or less than traditional energy sources such as coal-fired power.

As part of the country’s sustainability push, China remains the global leader in EV production and sales. Approximately three million EV units were sold in China in 2021, marking an incredible 154% year-on-year growth. Other governments are also implementing supportive measures to boost EV demand. As such, the entire global EV supply chain will have strong engines of growth in the foreseeable future, with the battery technology sector being one of the key beneficiaries. Currently, the top five battery makers are all based in Asia, with some of the largest battery manufacturers now based in China.

In a complex and unpredictable post-pandemic world, adoption of technology is essential for businesses to survive. Many companies have embarked on a digital transformation journey, integrating technology in the way they conduct business, serve customers and manage data. Over the coming years, we foresee continued growth in the space of artificial intelligence, virtual reality technology and digitalisation of business supply chains, which will ultimately permanently transform the way businesses operate.

A compelling year ahead

Given the returns of 2021, it is only natural to question the prospects for 2022, especially as the global economy transitions into a more normalised state of growth. We believe the upward trend in the equity markets is unlikely to be smooth.

If there is one thing that we have learnt living alongside Covid-19, it is that nothing is truly predictable and to always expect the unexpected. Despite the vaccination drives and increased knowledge of the virus, it is still running amok in the world.

Other long-standing risks still exist: the relationship between the US and China remains frosty, high inflation and the likely hiking of interest rates by central banks across the world.

Nevertheless, opportunities are aplenty in a challenging and exciting 2022, and investors would do well to align themselves with a trusted investment expert and invest in enduring investment themes to ride out any volatility.

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