Investment Newsletter – March 2023
Biden’s dramatic visit to Kyiv on 20 February 2023, amid wailing air raid sirens and his soaring speech in Warsaw a day later reinforced the West’s remarkable support for Ukraine’s resistance to Russia and directly repudiated President Vladimir Putin. But Putin issued his riposte in an annual address, framing the war in Ukraine as a wider existential battle against the West. After Biden vowed the US will be with Ukraine for as long as it takes, Putin’s speech underlined just how long that may be, raising the possibility of more years of war that will stretch the commitment of Western governments and populations to the cause. China is meanwhile injecting its own strategic play into this widening great power. China sent its top diplomat Wang Yi to Moscow for high-level talks, even with US warnings not to send Russia arms to use in Ukraine.
A lower valuation for China stock markets would provide the downside protection and the improvement of corporate earnings are expected to support the recovery. At the same time, considering the external and internal uncertainties as well as the lack of more new domestic policies, it is believed that the market may continue to be in a consolidation phase. Overall, the uncertainties are more likely to dent than to derail the structural positive forces in China economy.
In the longer run, China-US interest rate differentials are expected to narrow, and the capital market should maintain healthy development and further promote opening-up. Despite China’s monetary policy will remain moderately loose in the process of urgent economic recovery, it remains difficult for foreign investors to increase holdings of yuan-denominated bonds if the US Federal Reserve does not ease its policy anytime soon.
Stocks have posted a convincing rebound in 2023. After 2022’s more than 19% plunge, the S&P 500 has soared 8% so far this year, defying deteriorating earnings estimates and signs that the Fed will have to continue tightening policy to combat still-hot inflation. US stocks still look expensive and offer relatively low potential returns for the risk of owning them. Price-earnings ratios are above 18, versus around 15 in October 2022. Importantly, the equity risk premium or the extra return an investor can expect for investing in the stock market instead of risk-free 10-year Treasuries, is at its lowest level in about 20 years. In fact, over the past two decades, this risk premium has sat between 300 and 350 basis points; currently it’s at 167. This isn’t much different from what an investor might expect to earn from investment-grade credit, which generally is considered less risky than stocks. What’s more, the S&P 500’s dividend yield is just 1.7%, compared with the 6- month Treasury bill, offering a yield greater than 5%. Hence, valuation look unattractive.
