Investment Newsletter – June 2022
According to WHO organization, reported cases and deaths from COVID-19 continue to decline globally, although the trend should be interpreted with caution as many countries haves reduced the number of COVID-19 tests which reduces the number of cases find. Particularly, China is marching toward the second half of 2022 with a hard-won victory against the stealthy Omicron variant and great hope for achieving its full-year economic growth target. On the other hand, South Africa experienced a fifth wave of COVID-19 infections despite 97% of the population having antibodies, the results of a blood survey show. A recent fifth wave of infections that was driven by two sub-variants of Omicron – BA. 4 and BA. 5, peaked largely unnoticed in daily life and with little impact on rates of severe illness or death, according to Financial Times. Besides, Africa may not take COVID-19 vaccination as priority, given the fact that countries in the regions are facing other serious issues such as malaria, cholera, yellow fever, measles and malnutrition etc.
The recessions that often follow Fed tightening typically reflect imbalances and mismatches that were already underway by the time the Fed began tightening. Executives from Jamie Dimon and Elon Musk to Gary Friedman, chiefly of furniture retailer RH, all warned investors this week to be wary of an economic downturn. Besides the weaker consumer spending and supply chain issues, some of the country’s most outspoken corporate leaders have started sounding alarms about decades-high inflation and impending interest rate hikes. Bloomberg survey estimates a 30% chance of recession in the next 12 months, up from 15% in March.
China’s macro leverage ratio has risen steadily since 2017, with the average annual increase registering about 4.8 percentage points. Internationally, compared with other major economies, China has witnessed a relatively controllable rise in its macro leverage ratio since the outbreak of COVID-19, while propping up its fast economic recovery with a relatively small debt increase. Since 2021, with effective COVID-19 responses, steady economic recovery and effective macro policies, the macro leverage ratio has returned to a basically stable trajectory amid global market flush with liquidity, which created room for strengthened inter-temporal policy adjustments and greater support for the real economy.
Furthermore, the China financial system is awash with cash, and any monetary easing from the central bank, such as interest rate cuts and liquidity injections will be effective in spurring growth in the economy once the cycle turn upward. As of end May, the central bank and banking regulator ratcheted up their calls for lenders to boost loans, telling big financial institutions to “shoulder their responsibilities, make use of all resources to effectively connect with credit demand and strengthen policy transmission”. Once the demand side for loans are ready, the increase in leverage effect from the supply side will eventually lead to an increase in wealth effect on the demand side.
The Asia ex-Japan region’s forward price-to-earnings valuation has declined to 12x, implying a discount of about 15% to the 15-year average. Despite China is facing significant economic growth headwinds, but the market’s current valuation reflected most of them and this indicates buying opportunities.
