#Market Strategy — 10.03.2022

How Should Investors Position Amid Uncertainty?

Investment Navigator - Asia, March 2022

Prashant BHAYANI CIO Asia, Grace TAM Chief Investment Advisor, Hong Kong & Dannel LOW Investment Specialist at BNP Paribas Wealth Management

Key highlights

  • The major impact of the geopolitical event through higher commodity prices could bring inflation higher for longer and drag global growth. Severe sanctions against Russia also raises concerns over funding stress. Central banks’ path to normalisation has become more challenging.
  • Diversification via alternative investments (commodities, hedge funds, real assets, private equity), inflation hedges (precious & “green” metals, commodity currencies), defensive plays (dividend stocks & structured product solutions) can be considered in this uncertain environment.
  • China’s National People's Congress (NPC) put  emphasis on stabilising growth at around 5.5% this year with more fiscal and monetary easing. Some relaxation in the zero-Covid strategy to boost consumption is likely. Rebound in credit impulse historically is positive for China assets.

Heightened uncertainty amid geopolitical conflicts

Russia/Ukraine tensions have escalated sharply and severe global sanctions including removing selected Russia banks from the SWIFT system and imposing restrictive measures on the Russian Central Bank to disable its ability to use its forex reserves are unprecedented (though Russia’s energy sector is exempted from the SWIFT ban for now). 

russia key exports

What are the economic and market implications?

1. Limited direct impact on global growth - Russian economy will no doubt be in recession, but the country only accounts for less than 2% of global GDP.

2. Further inflation risks - Russia is one of the world’s key oil and gas exporters, producing 14% of and 19% of global oil and gas (supplying 40% of Europe’s gas). Russia is also the top exporter of wheat, fertilizers and some metals. Trade disruptions in these commodities lift prices higher, which is problematic for the global economy when inflation is already elevated. This also complicates central banks’ efforts to contain inflation.

3. Monitoring funding conditions – The toughened sanctions against Russia raises concerns over funding stress and contagion risk in the financial system, when financial conditions are already tightening amid central banks’ policy normalisation. We also believe major central banks will respond quickly in case of any sharp deterioration in market liquidity.

Read our last month's Investment Navigator  - Can the Chinese Tiger roar in 2022?

dollar funding

The Russia/Ukraine situation is very fluid and the end-game is obviously a big unknown, which will intensify market volatility in the near term. Nevertheless, impact of geopolitical events on financial markets tend to be short-lived historically. What really matters is the fundamentals of the global economy (which is still far from recession risk). The sell-off would gradually present buying opportunities for long-term investors when there is more certainty over the outcome of the Ukraine crisis.

geopolitical events

How to position in the current environment?

1.Diversification is the key – This can be achieved via alternative investments including commodities, low volatility hedge funds, infrastructure, real estate, private equity etc. Investors can also consider structured products for hedging solutions.

2.The theme “Riding the inflation regime” remains intact - Geopolitical tensions, high inflation, tight supplies and strong demand (post-Covid re-opening and carbon emissions targets) all contribute to a potential commodity supercycle. Investors can focus on precious metals, “green” metals and commodity currencies such as AUD, NZD and CAD (NZD is also a higher yielding play with RBNZ being the first mover in raising rates since October 2021). This theme can also be played though selected financials, natural resources miners/ producers and real assets.

commodity demand

3.Cautious on global equity in the short term but remains positive in the medium term – We tactically downgraded global equities to neutral in February 2022. By region, we downgraded the US to negative and Eurozone to neutral. By sector, we downgraded US tech and consumer discretionary to negative. Most recently, we also downgraded Eurozone energy and banks to neutral, while upgraded aerospace and defence to neutral. We prefer UK large caps, healthcare, mining oligopolies and high dividend stocks in the near term, while deep corrections provide good entry points for the ESG and Metaverse themes in the longer term. 

China is easing, in contrast to the rest of the world

Key highlights and expectations from the NPC

  • The government reiterated the priority of stabilising growth and call for stronger policy support to achieve a growth target of around 5.5% for 2022.
  • Fiscal support would take the lead, fueling a rebound in infrastructure investment, while monetary policy would maintain an easing bias, with further key rates and RRR cuts in coming months. We may also see a gradual and more transparent regulatory environment going forward.
  • The government would continue the "no speculation" property policy framework, while further fine-tuning the property policies such as allowing differentiated local easing and accelerating public rental housing construction.
  • We also expect the central government to gradually urge local governments to abolish excessive Covid restrictions to mitigate its negative impact on consumption, service activities and small and medium-sized enterprises. It is reported that Beijing is exploring exit strategy from zero-Covid policy and is likely to see experimental opening measures in selected cities as early as this summer.
  • Lastly, they re-emphasise a pragmatic push for decarbonisation while reiterating its long-term commitment to net zero carbon emissions remains unchanged.

Rebound in the credit impulse tends to be favorable for China markets historically. We prefer China A-shares which could directly benefit from the easing measures. We expect a rebound in distressed internet stocks but a sustainable rally requires catalysts. We also see selective bottom-fishing opportunities in China credit.

Overview of our CIO Asset Allocation for March 2022