Investment Newsletter – January 2022
Despite the huge number of newly detected infections, this coronavirus-stricken winter has so far proven to be less severe in Europe than last year thanks to mass vaccination campaigns and a possibility that the omicron strain may be milder than other variants. Nevertheless, most countries eye tighter COVID-19 control measures such as vaccine pass to limit access to those proof of vaccination or recovery from the illness. Furthermore, US banks which have been more proactive than other industries, tighten COVID-19 precautions and backtracks on ”return-to-office” as Omicron cases surge. On the other hand, the emergence of the highly transmissible Omicron variant will also drive Beijing to stick to its high vigilance against the virus. China welcomes 2022 with worst COVID-19 week and has reported a handful of imported Omicron cases and at least one locally transmitted case.
According to the Centre for Economics and Business Research (CEBR), despite the world starts the year with economies held back by a supply chain crisis and the rapid spread of the Omicron coronavirus variant, the global economy is still expected to grow by about 4% in 2022, compared with an estimated 5.1% in 2021. It’s also not possible to talk about the 2022 global economic outlook without addressing the proverbial elephant in the room: inflation. For decades, significant price growth eluded most major markets. Then, suddenly, a surge in demand coming out of the COVID-19 disruption, coupled with lingering supply-chain disruptions and labour shortages, created a perfect storm for price increases. Going forward, many central banks especially in the west will start normalizing monetary policy, while most emerging market growth will remain strong in the new year as business recovery. Particularly, China expects a rebound to be driven by policy easing.
China’s central bank is poised to move carefully toward easing monetary policy, even as the US is on its way to tightening policy. In moving in the opposite direction, the People’s Bank of China will need to strike a delicate balance, as policymakers keep a firm eye on inflation and the rising cost of US dollar-denominated debt. China policymakers are trying to “phase out the most indebted, or illiquid, or insolvent companies, in the meantime limiting contagion to other sectors. Moreover, China will utilize target monetary policy adjustments and to avoid a situation in which policy support causes a rise in costs for ordinary consumers as well as for businesses.
The S&P 500 now has a real earnings yield of negative 3.5%, the inflation-adjusted ratio of earnings per share to the stock price, is now the lowest since 1947. That said, negative yields are rare and often precede a stock market slump. Besides a potential bear market, there are two ways a negative earnings yield can turn positive: (1) Inflation drop significantly and (2) Corporate profits could accelerate faster than expected.
China’s total social financing, the broadest measure of credit supply declines since 2020, reflected the government’s efforts to deflate the housing bubble by tightening mortgage lending. Overall, the credit crunch has pushed most overleveraged developers into default, stalling the completion of apartments funded by advance payments from homebuyers. According to Bloomberg calculations and analyst estimates, China’s property developers have mounting bills to pay in January 2022 and shrinking options to raise necessary funds. The industry will need to find at least USD 197 Billion to cover maturing bonds, coupons, trust products and deferred wages to millions of migrant workers.
In 2021, China’s overall policy stance has undergone a major change. Even at the expense of economic growth occasionally, it will move towards greater state intervention and social goals. As a results, various regulatory actions and stricter policy stances worry global investors. Hence, global investors have low involvement in allocation of Chinese assets, which this is inconsistent with the growing weight of the Chinese economy in the world. Overall, a year-long regulatory crackdown on Chinese companies has created opportunities for global investors to pick up stocks at the cheapest valuation in years.
Investors, regulators and stakeholders in capital markets are paying increasing attention to social issues and this ESG theme will rise in prominence over 2022, Sustainable Fitch says in a new report. In conjunction, the nexus between environmental and social issues will become stronger as ESG integration becomes more sophisticated as more disclosures and data become available.
There are various motivations for pursuing CBDC, including increasing financial inclusion, facilitating faster and cheaper payment options, countering privately managed virtual assets, facilitating surveillance of financial activities and participants, and building newer, more direct levers to implement monetary policy. However, the potential risks include loss of privacy, vulnerability to cyberattack, and systemic risk arising from payment failures. China was the first to pilot its digital currency. Subsequently, several countries have been exploring and announcing the idea of a national blockchain-based digital currency to improve cross-border trade. There is a huge possibility that 2022 could be the year where more countries launching their own CBDCs.
