Last year, equities and bonds steered away from historical norm and moved in tandem in positive correlation. This year, equities and bonds are expected to go different ways. Shrugging off the impact of monetary tightening, equities staged a relatively impressive run in the first quarter on better-than-expected economic data and corporate results as well as share buybacks. The fact that investors started off with smaller exposures in stocks also contributed to the rally earlier this year as some bought on dips. As of now, markets had been extremely volatile as predicted early this year, because investor confidence was wobbly. The collapse of European and US banks sent shockwaves across financial markets. Market fears had not completely been contained. Thankfully, Asia has not been hit directly by the crisis.
The trajectory of capital markets remains murky. Valuations remain undemanding for European equities while Asian equities will benefit from China's reopening, and the region sees potentials from economic and valuation perspectives. Yet, given investor confidence remains shaky, we stayed cautious towards equities.
USD downtrend still intact; a boon to non-USD denominated equities
We are upholding our views from the start of the year about the economy will gradually soften. Before the banking turmoil, global economic data has stabilised with US economic prints holding up well. Non-farm payroll additions, property and consumer sectors all exhibited solid performance. Even though inflation is easing, it remained stubbornly elevated. CPI, the key inflation gauge that the Fed is keeping an eye on, rose 6% year on year in February, translating into a month-on-month increase of 0.4%. Inflation, albeit in line with expectations, is still far from the Fed's target of 2%. For all the reasons mentioned, rates look poised to remain higher for longer. Despite subsequent failures in banks, the Fed upheld its policy tightening in March and raised rates by 25 bp - a relatively dovish move in our view. The central bank noticed credit conditions have tightened in face of the banking crisis. Should the situation continues, it could slow the economy and prompt the Fed to reassess its policy trajectory. On the prospect of lower growth expectations and higher funding costs, corporate may feel reluctant to borrow and invest. As such, there is growing skepticism whether US households and businesses can withstand the accumulative rate hikes. Our investment teams see greater risk for economic contraction.
The USD bucked the downtrend from late last year and started to stabilise in February and March. But the greenback is expected to resume its downward momentum as it continues to face monetary policy headwinds. The peaking USD will not be beneficial to US equities, but will lend support to non-USD denominated equities.
China's recovery supports equities; Bottoming out semiconductor benefits Taiwan and Korea
Asia and China will be key growth drivers for the global economy this year. China's relaxation on mobility curbs is releasing demand pent up from the pandemic. March manufacturing PMI beat expectation and reached 51.9.
At a glance: Potentials in various Asian sectors
Remain constructive on Asia credit, but stay cautious until rates and sentiment settle
Asia's economy is in a different position than that of the US and Europe. While inflation in developed market is driven by services, Asia's prices are still led by goods. While the region's economy is relatively stable, interest rates of several Asian countries have already peaked or are approaching the peaks. Indonesia, Korea and Malaysia, have already put rate hike on hold, citing current levels deemed suffice to control core inflations that are easing. Among them, our investment teams find Indonesia's property high yield bonds appealing. Selected Korea's investment-grade bonds are also attractive. China's reopening will instill growth in the region. Favourable policies will continue to bolster Chinese high yield property and industrial bonds.
BEA Union Investment believes there is still sufficient slack in Asia to absorb the additional demand from China led reopening without propping up consumer prices. But we believe the PBoC will stay vigilant towards reopening-induced inflation as the central bank's governor Yi Gang was one of the first to sound the alarm. All in all, we remain constructive on Asia credit.
At a glance: Potentials in Asian bonds
China economic recovery is on track; still favour property bonds but stay alert
After the abrupt U-turn of covid, property and internet policies, the Chinese economic recovery is on track. Apart from recovery in traveling and entertainment, improvement can also be seen across consumer spending, industrial output and property markets. Retail sales jumped 3.5% in January and February from a year earlier, while industrial output registered a healthy rebound of 2.4%, thanks to increasing infrastructure spending.
We remain optimistic towards China's real estate sector. More builders managed to obtain guarantee to issue medium-term notes in addition to onshore bank strategic cooperation as well as offshore loan disbursement. News that some privately-owned enterprise also snapped up land bank implied healthy liquidity in the sector. Continuous news on funding support could keep the buoyant market sentiment. Housing demand is expected to pick up on the back of more favourable measures, such as the relaxation of home purchase restrictions and reduction of down payment. We continue to see opportunities in Chinese high-yield property. We are also keeping an eye out for potentials in Macau gaming bonds as well as Chinese industrial bonds, as positive impact from reopening and property policies takes time to further filter through.