Issues dominating the year ahead

Benjamin Cavalli Head of Wealth Management Asia Pacific Credit Suisse

• On equities: In late December, we turned neutral on equities from slightly overweight. This reduction in risk in December was on account of the emergence of the Omicron variant, and the increasingly hawkish shift in the US Federal Reserve. We now expect the Fed to hike rates 4 times this year, beginning March. Although we expect inflation to recede over the course of this year, uncertainty over inflation and Fed policy is likely to remain elevated. Compounding this is the fact that Omicron's high transmissibility might still cause significant disruption and damage to growth as infection numbers surge.

With China's stringent zero-Covid policy, rising infections could again hit global supply chains, which have just started to repair in recent months. Factors such as favourable liquidity and financing conditions, as well as the yield advantage of equities over high-quality bonds, still suggest that in the midterm, equities can achieve an excess return, which favours keeping strategic equity positions.

• Sustainable China: Throughout 2022, we continue to suggest focusing on sectors and themes that are aligned with the government's objectives. Our Sustainable China theme fits this bill and continues to deliver healthy returns. The power cuts in China last year, which have been tied in part to the pursuit of carbon emission targets, is testament to China's commitment to its 2060 carbon-neutral targets and supportive of the renewable energy space.

• Beautiful Europe: Exposure to European luxury stocks is an indirect way to benefit from China's new growth strategy under the ''common prosperity'' banner. While fears of increased taxation still remain, China's government has flagged its support for its middle class, with consumption being led by millennials. A recovery in discretionary consumer spending by China's middle class is likely to have a meaningful spillover onto European luxury goods, in our view.

• Indonesia reopens: Accelerating growth momentum, improving earnings outlook and a gentle normalisation monetary policy all make Indonesian equities our preferred mode of gaining exposure to South-east Asia's reopening and economic recovery. Strong commodity prices and below-mean composite equity valuations relative to emerging markets make a compelling case to turn positive on Indonesia at this time.

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• In fixed income, government bond yields will likely deliver negative returns in 2022. In credit, low spreads in investment grade and high yield will barely compensate for the risks associated with higher yields. We favour euro zone inflation-linked bonds and prefer senior loans. Within the Asia high-yield complex, we prefer the non-China property segment, which accounts for around 60 per cent of the total Asia HY space and should benefit from strong growth in both South and South-east Asia in 2022, where policy normalisation is likely to be gradual. The non-China property Asia HY segment is also healthy at the fundamental level, with a sharp improvement in the default rate (from 12.7 per cent in 2020 to just 2.3 per cent in 2021), in stark contrast to roughly 30 per cent in the China property segment.

Hou Wey Fook Chief Investment Officer DBS Bank

• Navigating the Fed's pivot: With the persistence of strong energy prices and supply chain disruptions, the US Federal Reserve is on track to tighten monetary policy this year. We expect the Fed Funds rate to hit 1 and 1.75 per cent by end-2022 and end-2023 respectively. As bond yields grind higher in the coming months, investors are advised to shift to quality plays - companies that are profitable and possess strong market positioning.

• Persistence of negative real rates: Despite the Fed's pivot to monetary tightening, the prevalence of negative real rates is here to stay as inflationary pressure rages on. Rates are expected to stay deeply negative by historical standards even if the Fed embarks on multiple rate hikes this year. Historically, negative real rates are stimulative for economies and are commonly associated with strong performance in equity markets. Based on our preferred model for analysing equity valuations, the equity risk premium for US equities stands at about 4.4 per cent and this augurs well for the outlook on equities.

• Resilience in corporate profitability: The postpandemic upward earnings revision has peaked and momentum is expected to revert to a more moderate pace. However, this by no means suggests that equity markets will undergo steep corrections. In the previous cycle, YoY upward earnings revision hit a peak in May 2010 and trended south before turning negative in July 2015. During this period, S&P 500 rallied 93 per cent. Corporate earnings are expected to stay resilient in the current cycle.

• Maintain preference for US/EU over Japan/Asia: For 1Q22, we maintain our constructive view on the developed markets of US and Europe. Positive earnings momentum for US tech-related companies and monetary accommodation by the European Central Bank are supportive factors. The biggest risks we see in 2022 are rising inflation leading to higher bond yields. US headline inflation hit 7 per cent in December, which was the highest level since June 1982. For equity investors, we recommend exposure to financials, quality stocks and selected value stocks in Europe to navigate this rising rate environment. The financial sector is sensitive to changes in interest rate, and historical data show that US banks do well when bond yields rise.

• Credit investors inadvertently face challenges in an inflationary environment. Three strategies can help to mitigate the effects. Firstly, focus on the sectoral winners of inflation such as energy, consumer discretionary, materials and financials sectors which tend to see better profitability under rising prices and steeper yield curves.

Secondly, capitalise on the structure of preferred securities. Subordinated debt instruments see higher spreads and more favourable structures (coupon resets, step-up features) that shorten duration and can adjust yields upward, commensurate with the prevailing environment. Thirdly, focus on markets with undemanding valuations.

Steve Brice Chief Investment Officer Standard Chartered Bank Wealth Management

Equities are likely to outperform bonds and cash. We expect economic growth in 2022 to remain well-supported, above its long-term trend, with H1 likely stronger than H2. The Fed is likely to start hiking interest rates in H1, but the level of central bank interest rates is likely to remain far from levels that hold back equity markets. The US and Europe are likely to lead global growth, while China is likely to manage a soft landing.

The inflation debate is unlikely to abate quickly. As a base case, we side with a view of moderating inflation. While many supply constraints are likely to extend into the early part of 2022, these are likely to ease as supply catches up and demand growth softens from 2021's historically high levels. This could still leave US inflation in the region of 3 per cent, though we believe this is unlikely to excessively concern the Fed unless signs of a wage-price spiral emerge; inflation expectations reach a new high; or there are other signs of broadening inflation.

On balance, more ''normalised'' policy settings are likely to result in more modest equity market returns, with somewhat greater volatility than in 2021, but global equities are still expected to outperform.

Within equities, we have a preference for Developed Markets (DM) over Emerging Markets (EM) which is driven by three factors. First, we believe the US and Euro area are in a relative sweet spot characterised by strong growth (which supports earnings) and supportive policy levels. Second, while consensus economic and earnings growth expectations are beginning to turn in favour of EM over DM in 2022, we believe three conditions for an equity market rotation towards EM - US dollar weakness, a significant turn in Chinese policy direction and an economic recovery led by widespread Covid vaccinations - are not imminent. Third, gradually rising volatility, combined with still-attractive stock and sector dispersion, means equity long/short alternative strategies can offer an attractive risk/reward.

Within bonds, we believe minimising interest rate sensitivity is likely to be key for bond investors. Against this backdrop of still-loose monetary policy setting and a continued strong global recovery, we expect high-yield (HY) bonds to outperform.

Finally, we expect the US dollar to weaken at some point in 2022. The US dollar is expensive from a valuation standpoint and relative yield differentials have room to move further against the greenback once a Fed cycle is fully priced in and attention moves to an eventual policy shift outside the US. A move towards greater outperformance of non-US equity and bond markets may very well catalyse a turn in the US dollar later in 2022.

A policy over-tightening error, a vaccine-evading Covid-19 variant, a significant upside inflation surprise or a geopolitical event are the key risks to our base scenario.

A traditional balanced portfolio should help to hedge the first two risks as they are disinflationary in nature and therefore the allocation to investment-grade bonds would offset losses in the pro-risks areas of the portfolio.

The other two are much harder to hedge, but gold is likely to do well in these scenarios. We also are increasingly allocating to private assets which we believe offer higher expected returns and lower correlations than traditional assets, although they are unlikely to offset the losses in bonds and equities under a true high-inflation environment

Eli Lee Head of Investment Strategy Bank of Singapore

In 2022, investors face a macro landscape marked by rolling virus outbreaks in key economies and increased geopolitical tensions around Ukraine, even as central banks wind down emergency stimulus measures and strive to tame inflation.

Markets are undergoing a volatile adjustment to the Fed's hawkish shift, which has driven a sharp increase in nominal and real yields as investors reassess their expectations for Fed policy tightening.

Our view is that risk assets continue to offer opportunities amid market volatility, underpinned by still-positive underlying economic growth momentum in key economies such as the US, China and Europe. We remain overall overweight in equities with a preference for Asia ex-Japan, which is supported by an improving outlook for the China equity market.

China's macro policies are loosening at the margins, and its effective tackling of the energy crisis late last year has led to a rebound in overall economic momentum, although recovery in specific sectors such as property have not been as broad based or quick as expected. We believe that the downside risks to growth are limited, but that the pace of recovery will continue to be gradual, as policymakers adjust their policies in a measured fashion.

The recent emphasis by senior officials on ''common prosperity'', ''dual circulation'' development and ''cross-cyclical'' economic strategy reinforces our view that China will continue to prioritise key long-term strategic goals over short-term growth.

Other Asian markets are expected to see an economic upturn in 2022 as they emerge more fully from the pandemic.

In commodity markets, oil prices have surged as demand concerns fuelled by the earlier rapid spread of the Omicron Covid-19 variant eased. The more contagious but milder Omicron wave seems to have solidified expectations that the Covid-19 pandemic will evolve into a more manageable endemic phase of the virus and thus lower the risk of stop-start global growth.

Supply pressures in the context of a low level of oil inventories have also driven up oil prices.

First, Opec+ has consistently missed its production quotas even as Opec+ has continued to power ahead with monthly increments to its aggregate output target.

Second, oil prices rebounded to nearly US$90/ bbl despite an increase in US oil inventories in recent weeks. This suggests that geopolitics, rather than fundamentals, are currently dominating price movements, which we believe will remain volatile. An adverse supply-driven increase in oil prices is historically more problematic for the global economy compared with a demand-driven rise in oil prices. Overall, although markets are unsettled, we still expect a moderately risk-on and well-diversified investment strategy to be rewarded over the rest of this year. But investment returns are unlikely to match those in 2021, and investors should be prepared for significant further market volatility well into Q1 2022 as risks such as new virus outbreaks, high energy prices and the stand-off between Russia and the US and its allies over Ukraine are met with diverging policy responses.

This uneven landscape calls for a much more selective investment approach, careful management of downside risks, and proper diversification. Beyond the near-term turbulence, we see new opportunities emerging from structural shifts associated with strategic policy initiatives worldwide to pursue greater security and resilience, and sustainable, climate-friendly development paths.