Insights

Have you ever stopped to imagine what would happen if the world’s central banks spent just over a decade pouring USD 25 trillion of liquidity into the economy with more than 60% of that liquidity created in the last two years? In this article, we’ll try to assess what has happened and think about how investors should navigate the next phase of the greatest financial experiment of all time.

The outlook is currently challenging. Tightening is coming, but it is not here yet and in the meantime current policy remains quite accommodative. There is no doubt that extremely easy policy boosted equity prices, which were reinforced by strong earnings. Still, we believe organic growth can continue.

Asian stocks had a tough start to 2022 amid concerns that persistent inflation could cause any tightening by the US Federal Reserve (Fed) to be more aggressive than expected. For the month, the MSCI AC Asia ex Japan Index fell by 3.10% in US dollar (USD) terms.

Increasing expectations of a more aggressive Fed tightening cycle have led to a sell-off in US Treasuries. We share our thoughts on what this means for investors in 2022 and discuss our outlook for Asian bond markets.

We see the volatility in the New Zealand markets as an opportunity to focus on new companies for which we have a high degree of confidence in their earnings.

Inflation is creating challenges for the New Zealand bond market and economy. In line with bond markets around the world, New Zealand’s market has had a difficult start to 2022. Bond yields and interest rates in general have been climbing as central banks hike rates to tackle soaring inflation.

We highlight the increasing importance of engagement in Japan, explain how it could be the key to unlocking the long-underperforming Japanese market’s potential, and assess how it can lead to the generation of alpha.

Going back to India for a month after two long years of not being able to visit my family, I was pleasantly surprised by the new normal. While there has been much adversity, COVID-19 has also sparked positive change, especially on technology adoption.

It would not be surprising if the major swings in the markets and macroeconomic conditions, including historic central bank shifts, have made most investors somewhat seasick. Recently on a day-to-day basis, markets seem to react quite irrationally, but the overall backdrop is fairly clear: the markets are getting accustomed to one of the most rapid and major shifts in Federal Reserve policy ever in its history.

The Federal Reserve may have been caught by surprise by the persistence of inflation in the USA over recent months but we suspect that many investors in the Emerging Markets are about to experience a similarly unpleasant surprise of their own.

An ability to look forward to better times and remain optimistic is invaluable. These attributes are no less helpful when investing in equities. Whilst you can get an unpleasant surprise from misjudging the direction of the tide while enjoying your picnic, the consequences for misjudging the direction of the liquidity waves look more pronounced than ever as we enter 2022.

As is often the case, markets are a better reflection of general sentiment than news headlines and so far, it points to an ongoing global recovery as equities hold their gains of 2021 and long-term bond yields rise. It may not be time yet to write off more difficult scenarios derived from the outbreak of Omicron, but facts so far do speak more positively than just one month ago.

On the back of uncertainties surrounding Omicron and major central banks turning hawkish, we deem it prudent to hold a slightly cautious stance on duration, as well as a slightly defensive stance on Asian currencies.

Taiwan and South Korea were buoyed by strong exports as sustained global demand for electronics supported hardware tech stocks amid widespread supply chain disruptions. The ASEAN region saw mixed returns. Thailand was the best performer as policymakers approved new stimulus measures to support domestic consumption, while the Philippines had to delay COVID-19 vaccinations on the back of Typhoon Rai.

We expect Japanese equities to rise significantly in 2022, supported by factors such as the government’s fiscal and coronavirus policies, the reshuffling of the Tokyo Stock Exchange (TSE) and robust exports.

While last month witnessed only its usual quota of central bank policy meetings, we suspect that it will ultimately go down in history as representing the beginning of what we suspect may become the Great Divergence within central banking. Having spent a generation moving in similar directions in an overt effort to suppress currency volatility, it now appears that the central banks within the major Economic Blocs are beginning to move in different directions. We believe that this development has the potential to dramatically alter the investment universe.

New Zealand faces the same kind of uncertainties other countries are confronting due to the global pandemic. But New Zealand, in some ways, has been in the vanguard of recovery from the COVID-19 outbreak.

Following the emergence of the new Omicron COVID-19 variant and with the World Health Organization declaring its concern, we hold a neutral view on duration in the near term and a slightly cautious stance on Asia currencies.

COP26 included a pledge by New Zealand and 100 other countries to achieve 30% cuts in methane emissions by 2030. Similar progress is being seen in the area of corporate disclosure as New Zealand is set to have its first climate-related disclosure standard by the end of next year.

The global outlook still looks positive, but less is known about the potential impact of the latest variant of the COVID-19 virus, Omicron—particularly in light of the fast government response to add restrictions on travel and, in some cases, local mobility.