Equities in Asean markets offer catch-up potential, especially within the healthcare and financial sectors, says Pictet Wealth Management in its 2022 outlook.
“We see Japanese growth accelerating from 1.8% to 2.2%, thanks to a delayed recovery in consumption and additional fiscal stimulus,” says Dong Chen, head of Asia macroeconomic research at Pictet Wealth Management.
Speaking from Hong Kong on Dec 9, Chen adds: “We expect growth to improve also in Indonesia and Vietnam, although uncertainties remain high, especially given relatively low vaccination rates. India should remain relatively stable at 8.0%, partly due to favourable base effects.”
On the other hand, momentum may moderate next year in technology powerhouses like South Korea and Taiwan following strong growth in 2021, says Chen.
Conditions for emerging market equities in 2022 could remain challenging, with China as the biggest swing factor, adds Pictet.
“The property downturn and Covid-19 restrictions could still weigh on Chinese growth in 2022, which we expect to decline to 4.5% from 7.7% in 2021.”
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The recovery in Chinese household consumption will likely be gradual, says Chen, as Covid-19-related constraints could remain in place most of next year. In addition, the current energy crunch and supply chain bottlenecks could dent households’ purchasing power and companies’ margins.
“The growth in Chinese exports should be robust, but gradually normalise as global supply chains improve. “We expect infrastructure investment to increase in 2022, in particular on green projects, although spending may not fully compensate for slower property investment,” says Chen.
“We expect an accommodative People’s Bank of China to make an additional cut to banks’ reserve requirement ratio in the first half of 2022, following the recent 50 basis points [bps] cut. Having dropped sharply since early 2021, credit growth may shortly start to rebound.”
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Global GDP growth to fall
Pictet expects global real GDP growth to decline to 4.5% in 2022 from 5.8% in 2021 as most economies reach “cruising speed”.
“We believe the economic cycle has some way to go, thanks to healthy consumer and corporate spending. After hectic growth this year, our central scenario is for real global GDP growth still to be above trend in 2022 at 4.5%,” says Alexandre Tavazzi, Asia chief investment officer, global strategist and head of CIO office at Pictet Wealth Management.
“However, with the emergence of the Omicron variant, the road ahead may not be a smooth one, and such fragile conditions justify an active-management approach to investing,” he adds.
Conditions in sea freight could ease after Chinese New Year, helping to cool down global inflation, with base effects also coming into play in 2022, adds Pictet. “All in all, we expect full-year global inflation to be 4.0% in 2022, down from 4.3% in 2021.”
Pictet’s 10 investment themes
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“Our themes for 2022 reflect the conviction that depending on Covid-19, consumer spending should remain healthy and will shift increasingly toward services and that cash-rich corporates will engage either in capex or in M&A,” says Tavazzi.
1. It’s not over till it’s over
Covid-19 will move progressively to endemic status, but in the meantime, further outbreaks will continue to pressure authorities to react, with resultant knee-jerk reactions in financial markets, says Pictet.
Some sectors will remain resilient in the face of this. “In such an environment, we expect active management to come into their own,” says Pictet. “Opportunities remain in healthcare stocks capable of generating high cash flow and technology stocks underpinned by structural growth.”
2. The Great Resignation
Labour shortages — and a languishing labour participation rate — could continue to contribute to higher inflation and bond yields in certain countries.
In response, Pictet highlights companies that possess pricing power, owing to strong branding, a superior product mix, and quality management. Pictet also points to senior US leveraged loans.
“Carrying a variable rate, which eliminates the duration risk, and offering a comfortable spread cushion, they should fare relatively well should the Fed embark on a rate-hiking cycle.”
3. The Green Marshall Plan
Following COP26, annual global investment in clean energy remains far below what is needed to smoothen the transition to cleaner sources of energy.
Massive post-pandemic fiscal packages around the world are largely focused on building or modernising infrastructure of various kinds, says Pictet, pointing to spending bills in the US and the EUR800 billion ($1,234.29 billion) temporary recovery instrument NextGenerationEU.
4. The ongoing income repression
With returns from developed-market government bonds set to remain low, investors will have to continue to look for alternative sources of income, says Pictet.
In the face of persistently low bond yields, the percentage of companies that pay a dividend yield higher than the yield return from corporate bonds has been growing.
“We continue to like ‘dividend growers’ — companies able to increase their dividend payouts to investors in a sustainable way,” says Pictet.
5. Increasing relevance of alternative investments
Within alternative investments, Pictet prefers real assets as a cushion against inflation, private equities as a growing asset class with low correlation to listed assets, and hedge fund solutions, such as M&A, event-driven, macro strategies.
Super-low interest rates and rising inflation mean yields offered by traditional assets have fallen and investors are willing to accept lower liquidity for higher returns.
6. From just-in-time to just-in-case
According to Pictet, the recovery in global demand was so vigorous in 2021 that supply and demand imbalances emerged, worsened by years of declining investment in sectors like oil.
“Given underinvestment and recent supply scares, we believe that the industrial sector, in particular, is ripe for an increase in capex. We think the increase in M&A activity will also provide ample opportunities for biotech stocks,” says Pictet.
7. The slow unbundling
Pictet foresees a “progressive dispersion” between China and US in terms of inflation, monetary policy, Covid-19 policies, growth momentum and strategic priorities.
This ‘unbundling’ will have consequences for assets in both developed and emerging markets.
As mentioned, Pictet believes undervalued Asean equities offer a proxy to attempts at reviving Chinese growth, without taking direct exposure to China.
“In the longer run, they could benefit from the ongoing relocation of major manufacturing facilities away from China,” says Pictet.
Similarly, European companies with Chinese exposure are a way to play a possible rebound in Chinese economic activity. “If those efforts come up short, the fading growth gap between China and Europe will make euro-area equities look relatively more attractive,” says Pictet.
8. Who pays the bill?
The challenge of funding the huge cost of the pandemic and the energy transition remains. Hence, Pictet has an overweight stance on Japanese equities.
“An economic stimulus in Japan worth 10% of GDP has recently been unveiled and will boost spending by households already sitting on significant amounts of excess cash. We believe Japan will be one of the few major economies where growth could accelerate in 2022, and we see potential for the returns on equity of Japanese companies to catch up to the levels prevailing in other developed markets,” says Pictet.
9. Too big to fail
The Chinese economy has been going through considerable upheaval. How issues in the heavily indebted real estate sector impinge on domestic consumption will be a key focus in the year ahead, says Pictet.
“Construction and property-related activity account for a high share of Chinese GDP (close to 30% by some estimates) and housing-related spending accounts for a much bigger percentage of personal consumption than in the US. We believe the sector is ‘too big to fail’, with signs the authorities are subtly moving to contain damage,” writes Pictet.
That said, the Asian credit universe was not affected by the real-estate-dominated Chinese high-yield market. Hence, Pictet continues to like Asian credits, given that they show superior potential risk-adjusted returns.
10. The Great Escape
As economies recover and inflation increases, central banks are reclaiming their freedom by raising interest rates.
“We expect this trend to continue in 2022, with the US Federal Reserve possibly beginning to raise policy rates in the middle of the year. Investors will have to live with the consequences, including a higher cost of debt and possible slowdown in corporate and economic growth,” writes Pictet.
“However, we expect nominal shortterm rates to remain below inflation for some time, in part to avoid a debt-driven recession,” says Pictet.
“The number of high-yield issuers upgraded to investment grade has been exceeding those downgraded to high yield. We believe that top-quality issues of this kind are best placed to resist the risk of higher bond yields in 2022 because of central bank tightening."
