The monetary policy statement of the January FOMC meeting yielded little surprise for us, with the Committee reaffirming the timing of the end of asset purchases and rate liftoff.
The asset purchase programme i.e., quantitative easing is expected to end by March. The Federal Reserve noted “it will soon be appropriate to raise the target range for the federal funds rate” which Chairman Jerome Powell indicated during the press conference to be March.
The Fed also released a set of high-level principles for reducing the size of its balance sheet, noting that “the Committee expects that reducing the size of the Federal Reserve's balance sheet will commence after the process of increasing the target range for the federal funds rate has begun”. This and Powell’s comments put the plausible start of quantitative tightening around May-July.
There is, however, upside risk to the trajectory as Chairman Powell’s statements during the press conference took on a hawkish tone.
He did not rule out the possibility of the Fed hiking successively at consecutive meetings this year and emphasised that the no decision had been made and that “the economy is in a very different place” relative to the start of the previous rate hike cycle in 2015.
Chairman Powell also discussed the considerable uncertainty around inflation and how monetary policy needs to be able to address an outcome “where inflation remains higher”. He also said the FOMC would move “steadily” away from its current highly accommodative stance.
We expect the Fed will raise interest rates by 25bps per quarter this year, starting in March, and we expect the reduction of its balance sheet to commence in May.
The risks of more than four hikes this year would be premised on how inflation evolves: We currently expect inflation to peak around the middle of year and believe that the Fed remains in control of its inflation mandate with inflationary expectations staying relatively anchored. This is aligned with the relatively muted responses in inflation break-evens and the longer end of the yield curve.
History shows that post-recession equity bull markets do not end with the first hikes of the interest rate cycle. Looking ahead, we see significant scope for volatility and a structural rotation to cyclical and value sectors, and we believe that the broader post-Covid equity bull market remains intact, given a still constructive global growth outlook.
The US economy grew by 6.9% annualised (consensus: 5.5%) in the last quarter of 2021 relative to 3Q. This translated to 5.5% year-on-year (YoY) growth in 4Q21 and 5.7% for the whole 2021. The positive surprise came from a much higher level of inventory accumulation in the last quarter, which contributed 4.9%-pts. Consumer spending grew by 3.3% annualised, which was stronger than 3Q’s 2.0%, but was softer than what the market expected. We continue to believe the US will continue to grow above-trend at 4.2% in 2022, for the second consecutive year. The real economy remains in a robust position despite the ongoing rates volatility.
The drag from Omicron is spilling over to 2022, but we believe it will not be protracted given the experience in the US and UK. The number of new Covid-19 cases in the US and UK are falling quite rapidly; the 7-day moving average in the US has fallen from the peak of ~800k in mid-January to ~550k as of 28 January. In the UK, the same number has halved from the peak of 180k at the start of this year to ~90K after one month. The number of deaths in the UK has held level at a low rate compared to the worst in early 2021, but continued to rise in the US.
Outside of the US, 4Q21 GDP reports are mixed due to near-term Omicron effects. Germany contracted sequentially by -0.7% due to the restrictions of non-vaccinated residents and continuing supply chain disruptions. Bellwether Asian economies of Taiwan and Korea fared much better, growing by 2.7% and 1.1% quarter-on-quarter in 4Q21.
In terms of PMIs, while the sequential momentum was negative, all the readings remain at or above the expansionary level of 50. The latest flash PMIs for developed markets indicated declines across both manufacturing and services in the month of January. Services fell quite significantly from 55.2 in December to 50.4 in January, while manufacturing slipped from 54.9 to 51.0.
In our asset allocation strategy, we remain overall overweight in equities but move our preference from US equities to Asia ex-Japan given relatively more attractive valuations and risk-reward. This is achieved by moving Asia ex-Japan from market weight to overweight, and by moving US equities from overweight to market-weight.
We also move our position in Hedge Funds from market weight to over-weight as we believe that increased dispersion in bottom-up investment performance will benefit market neutral alpha-seeking fund strategies, and to further benefit from added diversification in our asset allocation strategy.
In fixed income, we move our position in Emerging Market High Yield (EM HY) bonds from overweight to market-weight given the anticipated headwinds from rising yields and a muted outlook for the Chinese property sector.
In our view, the outlook for EM HY has become more challenging. The re-pricing of the US interest rates outlook has set up a more challenging backdrop for EM HY, with the rate trajectory being more aggressive than previously anticipated. The outlook in the Chinese real estate sector, which is the biggest exposure in EM HY, has also been muted. There is no doubt that policy support is turning accommodative in China, as we have seen from the reduction in interest rates and bank reserve requirements. However, consumers, financial institutions and onshore investors remain quite cautious, and credit flow to weaker parts of the real estate market has remained limited, triggering more defaults or debt extensions.
With property sales in China likely to remain soft, more measures and policy fine-tuning to ease credit and capital crunch are necessary before we turn more positive.
Lastly, the increased geopolitical tensions (e.g., Russia/Ukraine) are expected to pose some drags on the market. We continue to maintain market weight positions in developed market (DM) HY and underweight positions in investment grade (IG) in both DM and EM.
Outside of the real estate sector, however, we remain broadly confident of the China economic outlook this year. The first rate cuts by the PBOC since April 2020 to the 7-day reverse repo and the medium-term lending rates are clear signals that the authorities are turning a lot more accommodative.
This will help to spur more local government lending, which would help support capital investments and infrastructure spending necessary to replace the investment gap from the slowdown in the property sector.
Total social financing, which has already ticked up in December, will likely get another boost from the rate cuts announced. Industrial production in December accelerated to reach 4.3% YoY, and Chinese exports continued to perform, expanding by a robust 20% YoY. Several of the drags to the economy like supply-side issues and slow fiscal spending are expected to reverse, and will turn more supportive of growth this year.
Importantly, valuations of Chinese equities are undemanding, especially when compared to the US, which points to significantly more attractive risk-reward. The 12-month forward price-to-earnings for China is close to its 10-year average while that for the US is 1-standard deviation above.
This combination of the turn in macroeconomic backdrop and attractive valuations suggests relatively more attractive risk-reward in Chinese equities in 2022, which underpins our shift in overweight positions in equities from the US to Asia ex. Japan.
Marquee internet platform names like JD.com, Meituan and Alibaba are currently trading at -1 to -2 standard deviations below their average five year historical price-to-sales ratio, and forward price to earnings are also ~0.5 standard deviations below historicals (Alibaba is much lower).
In China, the financials and materials sector are expected to benefit from the cyclical turn taking place over 2022 while renewables and new energy vehicles are multi-year investment themes that will remain important areas to watch.
Selected internet and platform companies remain on a long and bumpy but nonetheless directionally positive path towards regulatory clarity and earnings recovery.
Lastly, with the emphasis on the welfare of the lower- and middle-income groups under common prosperity, consumption demand will be supported, especially as restrictive Covid-19 policies ease. Consumer staples and selected consumer discretionary like autos should remain core holdings.
The long-term policy focus on common prosperity, carbon neutrality and the careful management of credit and leverage will remain key for companies and their performance.
Disclaimers and Disclosures
This material is prepared by Bank of Singapore Limited (Co Reg. No.: 197700866R) (the “Bank”) and is distributed in Singapore by the Bank.
This material does not provide individually tailored investment advice. This material has been prepared for and is intended for general circulation. The contents of this material does not take into account the specific investment objectives, investment experience, financial situation, or particular needs of any particular person. You should independently evaluate the contents of this material, and consider the suitability of any product discussed in this material, taking into account your own specific investment objectives, investment experience, financial situation and particular needs. If in doubt about the contents of this material or the suitability of any product discussed in this material, you should obtain independent financial advice from your own financial or other professional advisers, taking into account your specific investment objectives, investment experience, financial situation and particular needs, before making a commitment to purchase any product.
This material is not and should not be construed, by itself, as an offer or a solicitation to deal in any product or to enter into any legal relations. You should contact your own licensed representative directly if you are interested in buying or selling any product discussed in this material.
This material is not intended for distribution, publication or use by any person in any jurisdiction outside Singapore, Hong Kong or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank or its related corporations, connected persons, associated persons or affiliates (collectively “Affiliates”) to any licensing, registration or other requirements in such jurisdiction.
The Bank and its Affiliates may have issued other reports, analyses, or other documents expressing views different from the contents of this material, and may provide other advice or make investment decisions that are contrary to the views expressed in this material, and all views expressed in all reports, analyses and documents are subject to change without notice. The Bank and its Affiliates reserve the right to act upon or use the contents of this material at any time, including before its publication.
The author of this material may have discussed the information or views contained in this material with others within or outside the Bank, and the author or such other Bank employees may have already acted on the basis of such information or views (including communicating such information or views to other customers of the Bank).
The Bank, its employees (including those with whom the author may have consulted in the preparation of this material))and discretionary accounts managed by the Bank may have long or short positions (including positions that may be different from or opposing to the views in this material or may be otherwise interested in any of the product(s) (including derivatives thereof) discussed in material, may have acquired such positions at prices and market conditions that are no longer available, may from time to time deal in such product(s) and may have interests different from or adverse to your interests.
Analyst Declaration
The analyst(s) who prepared this material certifies that the opinions contained herein accurately and exclusively reflect his or her views about the securities of the company(ies) and that he or she has taken reasonable care to maintain independence and objectivity in respect of the opinions herein.
The analyst(s) who prepared this material and his/her associates do not have financial interests in the company(ies). Financial interests refer to investments in securities, warrants and/or other derivatives. The analyst(s) receives compensation based on the overall revenues of Bank of Singapore Limited, and no part of his or her compensation was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this material. The reporting line of the analyst(s) is separate from and independent of the business solicitation or marketing departments of Bank of Singapore Limited.
The analyst(s) and his/her associates confirm that they do not serve as directors or officers of the company(ies) and the company(ies)or other third parties have not provided or agreed to provide any compensation or other benefits to the analyst(s) in connection with this material.
An “associate” is defined as (i) the spouse, parent or step-parent, or any minor child (natural or adopted) or minor step-child, or any sibling or step-sibling of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, parent or step-parent, minor child (natural or adopted) or minor step-child, or sibling or step-sibling is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
Conflict of Interest Declaration
The Bank is a licensed bank regulated by the Monetary Authority of Singapore in Singapore. Bank of Singapore Limited, Hong Kong Branch (incorporated in Singapore with limited liability), is an Authorized Institution as defined in the Banking Ordinance of Hong Kong (Cap 155), regulated by the Hong Kong Monetary Authority in Hong Kong and a Registered Institution as defined in the Securities and Futures Ordinance of Hong Kong (Cap.571) regulated by the Securities and Futures Commission in Hong Kong. The Bank, its employees and discretionary accounts managed by its Singapore Office/Hong Kong Office may have long or short positions or may be otherwise interested in any of the investment products (including derivatives thereof) referred to in this document and may from time to time dispose of any such investment products. The Bank forms part of the OCBC Group (being for this purpose Oversea-Chinese Banking Corporation Limited (“OCBC Bank”) and its subsidiaries, related and affiliated companies). OCBC Group, their respective directors and/or employees (collectively “Related Persons”) may have interests in the investment products or the issuers mentioned herein. Such interests include effecting transactions in such investment products, and providing broking, investment banking and other financial services to such issuers. OCBC Group and its Related Persons may also be related to, and receive fees from, providers of such investment products. There may be conflicts of interest between OCBC Bank, the Bank, OCBC Investment Research Private Limited, OCBC Securities Private Limited or other members of the OCBC Group and any of the persons or entities mentioned in this report of which the Bank and its analyst(s) are not aware due to OCBC Bank’s Chinese Wall arrangement.
The Bank adheres to a group policy (as revised and updated from time to time) that provides how entities in the OCBC Group manage or eliminate any actual or potential conflicts of interest which may impact the impartiality of research reports issued by any research analyst in the OCBC Group.
If this material pertains to an offer, it may only be offered (i) in Hong Kong, to qualified Private Banking Customers and Professional Investors (as defined under the Securities and Futures Ordinance); (ii) in Singapore, to Accredited Investors (as defined under the Securities and Futures Act 2001); and (iii) in the Dubai International Financial Center, to Professional Clients (as defined under the Dubai Financial Services Authority rules). No other persons may act on the contents of the material.
Other Disclosures
Singapore
Where this material relates to structured deposits, this clause applies:
The product is a structured deposit. Structured deposits are not insured by the Singapore Deposit Insurance Corporation. Unlike traditional deposits, structured deposits have an investment element and returns may vary. You may wish to seek independent advice from a financial adviser before making a commitment to purchase this product. In the event that you choose not to seek independent advice from a financial adviser, you should carefully consider whether this product is suitable for you.
Where this material relates to dual currency investments, this clause applies:
The product is a dual currency investment. A dual currency investment product (“DCI”) is a derivative product or structured product with derivatives embedded in it. A DCI involves a currency option which confers on the deposit-taking institution the right to repay the principal sum at maturity in either the base or alternate currency. Part or all of the interest earned on this investment represents the premium on this option.
By purchasing this DCI, you are giving the issuer of this product the right to repay you at a future date in an alternate currency that is different from the currency in which your initial investment was made, regardless of whether you wish to be repaid in this currency at that time. DCIs are subject to foreign exchange fluctuations which may affect the return of your investment. Exchange controls may also be applicable to the currencies your investment is linked to. You may incur a loss on your principal sum in comparison with the base amount initially invested. You may wish to seek advice from a financial adviser before making a commitment to purchase this product. In the event that you choose not to seek advice from a financial adviser, you should carefully consider whether this product is suitable for you.
Hong Kong
This document has not been delivered for registration to the Registrar of Companies in Hong Kong and its contents have not been reviewed by any regulatory authority in Hong Kong. Accordingly: (i) the shares/notes may not be offered or sold in Hong Kong by means of any document other than to persons who are "Professional Investors" within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and the Securities and Futures (Professional Investor) Rules made thereunder or in other circumstances which do not result in the document being a "prospectus" within the meaning of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of the Companies (Winding Up and Miscellaneous Provisions) Ordinance; and (ii) no person may issue any invitation, advertisement or other document relating to the shares/notes whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the shares/notes which are or are intended to be disposed of only to persons outside Hong Kong or only to "Professional Investors" within the meaning of the Securities and Futures Ordinance and the Securities and Futures (Professional Investor) Rules made thereunder.
The product may involve derivatives. Do not invest in it unless you fully understand and are willing to assume the risks associated with it. If you have any doubt, you should seek independent professional financial, tax and/or legal advice as you deem necessary.
Where this material relates to a Complex Product, this clause applies:
Warning Statement and Information about Complex Product
(Applicable to accounts managed by Hong Kong Relationship Manager)
Where this material relates to a Complex Product – funds and ETFs, this clause applies additionally:
Where this material relates to a Complex Product (Options and its variants, Swap and its variants, Accumulator and its variants, Reverse Accumulator and its variants, Forwards), this clause applies additionally:
Where this material relates to a Loss Absorption Product, this clause applies:
Warning Statement and Information about Loss Absorption Products
(Applicable to accounts managed by Hong Kong Relationship Manager)
Before you invest in any Loss Absorption Product (as defined by the Hong Kong Monetary Authority), please read and ensure that you understand the features of a Loss Absorption Product, which may generally have the following features:
Where this material relates to a certificate of deposit, this clause applies:
It is not a protected deposit and is not protected by the Deposit Protection Scheme in Hong Kong.
Where this material relates to a structured deposit, this clause applies:
It is not a protected deposit and is not protected by the Deposit Protection Scheme in Hong Kong.
Where this material relates to a structured product, this clause applies:
This is a structured product which involves derivatives. Do not invest in it unless you fully understand and are willing to assume the risks associated with it. If you are in any doubt about the risks involved in the product, you may clarify with the intermediary or seek independent professional advice.
Dubai International Financial Center
Where this material relates to structured products and bonds, this clause applies:
The Distributor represents and agrees that it has not offered and will not offer the product to any person in the Dubai International Financial Centre unless such offer is an “Exempt Offer” in accordance with the Market Rules of the Dubai Financial Services Authority (the “DFSA”).
The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers.
The DFSA has not approved the Information Memorandum or taken steps to verify the information set out in it, and has no responsibility for it.
The product to which this document relates may be illiquid and/or subject to restrictions in respect of their resale. Prospective purchasers of the products offered should conduct their own due diligence on the products.
Please make sure that you understand the contents of the relevant offering documents (including but not limited to the Information Memorandum or Offering Circular) and the terms set out in this document. If you do not understand the contents of the relevant offering documents and the terms set out in this document, you should consult an authorised financial adviser as you deem necessary, before you decide whether or not to invest.
Where this material relates to a fund, this clause applies:
This Fund is not subject to any form of regulation or approval by the Dubai Financial Services Authority (“DFSA”). The DFSA has no responsibility for reviewing or verifying any Prospectus or other documents in connection with this Fund. Accordingly, the DFSA has not approved the Prospectus or any other associated documents nor taken any steps to verify the information set out in the Prospectus, and has no responsibility for it. The Units to which this Fund relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers should conduct their own due diligence on the Units. If you do not understand the contents of this document you should consult an authorized financial adviser. Please note that this offer is intended for only Professional Clients and is not directed at Retail Clients.
These are also available for inspection, during normal business hours, at the following location:
Bank of Singapore
Office 30-34 Level 28
Central Park Tower
DIFC, Dubai
U.A.E
Cross Border Disclaimer and Disclosures
Refer to https://www.bankofsingapore.com/Disclaimers_and_Disclosures.html for cross-border marketing disclaimers and disclosures.
