Investment Newsletter – July 2022
WHO’s chief warned that the ability to track the virus is under threat as reporting and genomic sequences are declining. The optimistic mid-year deadline for all countries to vaccinate at least 70% of their populations is looking unlikely, with the average rate in low-income countries, standing at 13%. According to NUS East Asian Institute’s Dr Chen Gang, Shanghai emerged from a two-month lockdown on 1 Jun 2022, to the relief of its residents. But worries about further “closed management” movement restrictions persist as all districts are required to conduct mass COVID-19 testing every weekend until the end of July. Crisis mentality has captured policymakers who would rather normalise testing than trust protection from vaccines. The focus seems to be on the worst-case scenario and the preparations and precautions that must be made to avert it – regardless of time, financial resources or emotional distress. In fact, over 1.5 million COVID-19 deaths could occur if the zero-COVID policy is dropped without additional safeguards, according to one study.
The textbook definition of a housing bubble requires three things. First, exuberant demand boosted by speculation which rush into the housing market. Second, spiked home prices would travel well above what incomes can support and reach overvaluation levels. Third, the housing bubble pops and home prices fall. The Pandemic housing boom has sent US home prices up a staggering 41.6% since January 2020. That swift move-up in home prices (which is far above the 4.4% posted in a typical year since 1987) has economists perplexed. Despite the Pandemic Housing Boom isn’t underpinned by the unsound mortgage vehicles that drove the last bubble, there are signs of top on the US housing market driven by weakening in US housing affordability as rates increase.
Given that valuations remain elevated by historical measures, realizing economic recession risks requires further repricing for a coming earnings recession. That said, the problem with lower “P/E” ratio has moved, but the current “E” is yet to be priced into the market. Earnings are one of, if not the best, recession signs for investors. Given that earnings estimates remain elevated, the eventual downward revisions will require a further repricing of assets to compensate. In other words, this bear market cycle is likely not over yet. On average for S&P 500 based on historical studies, the average drop of 36.7% lasts about 17 months, while the median drop lasts 14 months is less severe at 29.6%. Finally, those wondering how long to wait for a new high, the answer is on average over 2 years.
International investors have been pursuing Chinese assets in both the onshore and offshore markets over the past month, and this trend will continue in the coming weeks as the country’s economy rebounds due to strong policy support from the investment and consumption sector. Major A-share companies will likely regain their footing and go back to a normal market value as the economy recovers gradually and more measures are put in place to spur investment and consumption. That said, China is among his preferred markets in Asia due to the recent easing in COVID-19 restrictions, government stimulus measures and lower stock valuations.
It is believe that when most countries in the world are in tightening, China maintains a loose policy environment, which this is conducive to the stock market, making China’s stock market in the global allocation can not be ignored. Furthermore, valuations are gaining support as the market has priced in regulatory reforms, COVID-19 disruptions and a real estate slowdown despite downward revisions to earnings forecasts over the past four months. Although the market bottom is not easy to find, the current valuation still provides a very attractive opportunity. Hence, investors can play down short-term uncertainties and focus on opportunities for a mid-to-long-term recovery, as the government response and the country’s economic momentum should help it find a way through these setbacks.
Economists have raised 2022 growth forecasts for Indonesia, the Philippines and Thailand as they expect growth in the first half of the year to be higher than forecast, thanks to a relaxation of COVID restrictions. However, there are downward revisions to forecasts for the latter half of 2022 for each country due to concerns about slowing economies following the US interest rate hike and ongoing inflation. Most central banks in ASEAN countries are moving to raise policy interest rates, followed by Malaysia and the Philippines. Overall, the steep hikes in US interest rates would likely trigger a sharp slowdown in the economy.
