ALL hope for a dovish shift that led the stock market rebound in June and July evaporated late last month after US Federal Reserve Chairman Jerome Powell made it clear at the annual Economic Symposium Jackson Hole that inflation needed to come down and worries about an economic slowdown were not a priority.
Oil and stock prices fell on fears that the US central bank’s hawkish approach to fighting inflation could hurt the global economy and hurt demand.
Nonetheless, Manulife Investment Management (MIM) believes stocks are already significantly weaker and investors should seize rally opportunities over the next 12-18 months.
But how exactly are investors supposed to do this in an environment of tighter monetary policy, market uncertainty and volatility?
Paul Kalogirou, Managing Director and Head of the Asia Client Portfolio Management Team at MIM, says investors who believe there is a high downside risk over the next five to six months should opt for higher stocks. defensive, global income or high dividend stocks. counters.
Those with a higher tolerance for risk, meanwhile, may want to consider U.S. high-yield bonds or broad blended emerging-market high-yield corporate bonds, says Kalogirou, who is also a client portfolio manager. within MIM’s multi-asset solutions team in the region. .
“Certainly, parts of emerging markets (EM), from a valuation perspective, are attractive. If you ask me, would I prefer to invest in US or EM bonds, I would still say that the US is more favorable because their default rates are quite low, when they could offer 6% to 7 % yield. That said, emerging market bonds have their place in the market, and if investors are looking for a 9% to 10% yield, these are the options available to them,” he told The Edge. in a virtual interview.
Hong Kong-based Kalogirou, who has 19 years of experience in the financial sector, including 15 in Asia, notes that the macroeconomic environment is not necessarily fully correlated with what is happening in the market.
“You could have a really bad macro. But at the same time, you could have a pretty positive market, and obviously, the other way around. In terms of where we are today, the aggressive Fed rate hike profile has been somewhat priced in by the market,” he observes.
He recalls that in June and July, the world market was rather optimistic despite the Fed’s rate forecasts anchored around 3.5% to 3.75%. However, the market softened following the Jackson Hole conference, not to mention higher than expected inflation impressions in Europe.
“If we see high inflation, then it’s safe to say the Fed needs to do a bit more. And as a result, the market will have to digest the potential for higher Fed rates than they expected a few years ago. months,” warns Kalogirou.
He reiterates that the Fed is unlikely to soften its rhetoric and in many ways the central bank has yet to push through the rate hike profile because the US needs to get inflation under control.
“Remember we still have the US midterm elections in November. Joe Biden is very likely to want to be seen as an inflation-fighting president and therefore he is going to keep the pressure on Jerome Powell to keep pushing the inflation number down. Overall, global equity and debt markets will remain volatile,” he said.
Retest the bottoms?
Although some quarterbacks believe stocks bottomed in June – some even forecast the market would end the year higher than May – Kalogirou says MIM, at least from the perspective of its tactical asset allocation portfolio, believes that the indices will instead retrace their lows.
“So we’re talking about the S&P 500 possibly retesting the 3,700 to 3,800 levels. One of the reasons is that we haven’t really seen a full runout or any real panic selling in the market. Of course, we can we be wrong and the day [of massive sell-off] may never come,” he adds.
“But there are still a lot of factors – the language of the Fed, geopolitics, the US midterm elections – for the market to digest by the end of the year, and we will see how these events play out. Overall, we maintain a fairly cautious attitude.
The S&P 500 closed at 3,955 points last Wednesday.
With the ongoing Covid-19 pandemic, Fed rate hikes, Russia-Ukraine war and global recession fears, can things get worse in 2022?
Kalogirou warns that the world could see a further breakdown of geopolitics, such as relations between the United States and China, as well as those between Russia and Europe. The market, however, will try to look past it all, so the outlook may not be bad. “One of the threats is that Russia could cut off its raw material supplies to Europe in the winter. We are already seeing stress in Europe on the price of gas and electricity. There could be a worsening of conditions for consumers or the man on the street as their disposable income and their families will be affected,” he points out.
As the black swan, the bear and the hawk crossed in 2022, Kalogirou insists that the recession of the early 2000s, the global financial crisis of 2008/09 and the Covid-19 crisis in 2020 have been much worse for the markets.
“We then saw a much steeper and worse stock market decline. But of course, from a macro perspective, when you look at geopolitics, what Covid-19 has done to growth rates, what the Russian-Ukrainian war did to raw materials, and what decoupling and de-globalization did to supply chains, so yes, there were big impacts on the market,” he acknowledges.
“But if we look at the performance of the S&P 500, we haven’t seen a significant decline from the top. Markets are clearly pricing in a lot of bad news. If we think about how the world looked at Covid-19 in 2020 and the way markets recovered from lows in March of that year, there was a lot of capital inflow into the markets,” says Kalogirou, who joined the firm in 2019.
Like it or not, he says, over time there will be periods when investors experience uncertainty, because they are part of market cycles. “I’m not saying we’re not in uncertain times, because we certainly are, but there are always pockets of opportunity. to have come to buy now, especially for investors who have a reasonably higher risk appetite.
Kalogirou suggests that investors start adding some of the spread assets and risk assets to their portfolio gradually. As for those with a lower risk profile, they should be exposed to higher quality fixed income or higher income equities.
Investors starting with a clean slate and considering a capital allocation may want to buy growth stocks with struggling valuations. “But if you’ve already built a portfolio, you might want to look into value-oriented stocks that offer attractive dividend yields that could add income to your portfolio,” he says.
“In short, that’s how we approach it. It’s basically our Manulife global multi-asset diversified income strategy. We recommend our clients look to more income-related asset classes, such as dividend-paying stocks, REITs (real estate investment trusts), and traditional fixed-income assets.
Distrust of the Chinese credit market
Interestingly, Kalogirou points out that China has been a challenge when it comes to the credit market. In addition, the country’s real estate market is in great difficulty.
He observes that China’s zero-Covid policy is impacting its economy, while Chinese developers face mortgage boycotts. “Of course, the slowdown in growth is obvious. Demand for base metals has declined and this has been reflected in lower iron ore and aluminum prices.
While MIM’s global multi-asset portfolio is exposed to credits in China, the company relies on its credit analysis team to ensure that there will be no defaults in its portfolio.
“We will choose Chinese credits that we believe will survive. At the same time, for credits where we believe the risk of default is high, we will diversify out of China but remain in Asian credits, such as India and Indonesia, which are more correlated to markets. high-yielding Americans,” Kalogirou says.
“Don’t get me wrong, there are still good opportunities in the Chinese credit market, but you’re likely to take a lot of risk to get that return. So you might want to branch out into other Asian credits.
He says it is up to individual fund managers to help manage these risks and lessen the impact of declining Asian credit portfolios. MIM is not increasing its exposure to Chinese equities.
“There have been times when we have tried to add to the Hong Kong stock market, but overall we are still concerned about China’s zero-Covid policy, its impact on the business environment and sentiment. market,” says Kalogirou.
Nevertheless, he is quick to state that MIM is not reducing its exposure to Chinese equities because the company has not invested heavily in the country. “It’s really a neutral decision. It’s not a condemnation. It’s not about pruning,” he says.
Malaysia, a relative macro-outperformer
On the domestic front, MIM’s analysis suggests that Malaysia will be a relative macro outperformer among other Asia-Pacific economies, alongside Indonesia and Vietnam.
“We continue to believe that the economies most insulated from the negative demand shock are net exporters of food and energy, those less dependent on foreign capital, and those that still have policy space. At the same time, the economies most able to mitigate the negative supply shock will have a relatively lower weight for food and energy in their inflation and import baskets,” Kalogirou points out.
In general, MIM believes that defensive sectors like consumer staples will outperform cyclical sectors, such as consumer discretionary and financials, at this point.
Kalogirou urges investors to stay invested in these uncertain times, but stresses that they must be prepared to adjust their portfolios to specific macro contexts and macro regimes. “We are in high inflation, low growth and difficult financial conditions. So we have to ask ourselves which asset classes are most relevant in these types of environments?
“In the meantime, we should also look at which asset classes will benefit when inflation starts to moderate, growth starts to pick up and financial conditions ease. There are always portfolios that could do all of this to you. “