As the markets fell further on June 14 following the higher-than-expected inflation print for the US on June 10, Tai Hui, Asia chief market strategist at JP Morgan Asset Management says there are a few things Asian investors can do during this volatility.
In a note dated June 14, Tai has advised investors to “adopt a more balanced portfolio between equities and fixed income”.
“While duration risk is still a short-term challenge for fixed income, the income generated from government and corporate bonds offer a better cushion to offset price volatility from rising rates,” says the analyst.
“Investment-grade corporate debt strikes a good balance between income generation and resilience against slowdown concerns,” Tai adds.
On equities, the analyst notes that both the onshore and offshore Chinese markets are seeing more “policy tailwind” with a strong uptick in data in May.
“Fiscal and monetary policy should also help to provide more lift to the economy. The regulatory uncertainties are also easing,” says Tai.
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“For the rest of Asia, growth concerns in the US and Europe could impact exporters. However, Asian domestic demand outlook is improving with more economies reopening their economies and the service sector,” the analyst adds.
“The current earnings outlook for Asian equities seems too conservative for 2022 and valuation is also attractive once market sentiment improves.”
Choppy 3Q2022 ahead: OCBC
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Selena Ling, chief economist & head of treasury research & strategy at OCBC Bank is expecting investor sentiments to “remain fickle” since the US Federal Reserve (US Fed) is “likely” to press on with rate hikes of at least 50 basis points in the subsequent Federal Open Market Committee (FOMC) meetings this year.
There is also the possibility of rate hikes of up to 75 basis points if the data on US inflation warrants it, says Ling in a statement on June 16.
As such, Ling is also expecting the financial market conditions to “stay choppy” into 3Q2022.
Ling’s statement comes after the S&P500 ended a five-day rout to rally at 1.46% on June 15 (US time). The rally came after Jerome Powell, chairman of the US Fed said that outsized rate hikes will be rare.
The analyst rightly pointed out that the relief would be short-lived.
“The fact remains that the Fed has kicked off its rate hike cycle and is clearly focused on combating inflation which hit a more than four-decade high of 8.6% recently. The FOMC statement ‘anticipates that ongoing increases in the target range will be appropriate’. ‘It is not going to be easy’, according to Fed chair Powell [although he also noted that] ‘it will take some time to get inflation back down’,” says Ling.
“Indeed, the Fed’s core personal consumption expenditures (PCE) projections at 2.3% see inflation still above their 2% target even in 2024, albeit this is off the 4.3% high for this year and 2.7 next year. After the initial market euphoria, one still has to grapple with the likelihood that the Fed will hike another 175 basis points to hit 3.4% by year-end and reach 3.8% by end-2023 before potentially easing to 3.4% by end-2024, according to the FOMC projections,” she adds.
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True enough, stocks tumbled a day after on the back of resurfacing recession fears.
On June 16 (US time), the S&P500 closed at its lowest since December 2020 while the tech-heavy Nasdaq 100 declined by 4%.
As at her note, Ling is remaining cautious on Asian markets for the time being.
“Recent economic indicators suggest the Chinese economy is not out of the woods yet. Second, food and fuel price pressures continue to increase, imply further upside inflation risks for Asean economies,” she writes. “This implies the pressure is still on for Asian central banks like Monetary Authority of Singapore (MAS), Bank of Korea (BOK), Bank Negara Malaysia (BNM) and others to press on with further monetary policy tightening, and also puts pressure on central banks like the Bank of Thailand that have not joined the bandwagon of monetary policy tightening yet to do so sooner rather than later.”
US Fed likely to hike 75 basis points in July: BoS
Bank of Singapore (BoS)’s chief economist Mansoor Mohi-uddin is expecting the US Fed to hike 75 basis points again in July to hit neutral levels of 2.50% for Fed funds.
Mohi-uddin’s report on June 16 comes after the Fed raised its fed funds rate by 75 basis points for the first time since 1994.
He is also expecting the Fed to hike rates by 50 basis points in September and November and 25 basis points in December to reach 3.50% to 3.75% by the end of the year.
Chairman Powell had said that another rate hike of either 50 basis points or 75 basis points was likely at the next FOMC meeting in July.
As the FOMC cut its GDP forecasts albeit with a projected growth of 1.7% in 2022 and 2023, Mohi-uddin deems the risks as still being skewed towards the Fed needing to “front-load its tightening” to reduce inflation in 2022 as it did in 1994.
At the time, the Fed hiked by 50 basis points at every meeting of the year and 75 basis points at its last meeting in 1994.
In addition, Mohiuddin is expecting to see at least one hike of 25 basis points in January 2023 to 3.75%-4.00% with risks of further rises in 2023 if core inflation stays near 4%.
“We also lift our Treasury yield forecasts with 10-year yields reaching 4.00%. This keeps us bullish on the USD against other major currencies,” he writes.
“[Currently], the chart shows the fed funds rate at 1.50%-1.75% remains below the FOMC estimate of its ‘longer-run’ or neutral level that neither stimulates nor contracts the economy,” says the analyst.
“To restrict inflation, we expect the fed funds rate will need to rise to at least 4.00% now, well above neutral levels of 2.50%,” he adds.
