Given prolonged uncertainties relating to the Russia-Ukraine conflict, difficult near-term conditions in China, and sustained inflationary pressures keeping the Federal Reserve and other major central banks on a hawkish path, our macroeconomics team has lowered our 2022 global growth forecast from 3.7% to 3.3%.
Asia as well will suffer a significant hit from the deterioration of global conditions, not least because of its close economic ties with China, which is suffering a considerable hit to consumption and productivity due to difficulties imposing a zero-Covid policy against the spread of Omicron.
As a result of weaker growth prospects, in our asset allocation breakdown within Asia, we downgrade our rating for Indonesia from Overweight to Neutral, and our rating for South Korea from Neutral to Underweight.
Downgrading South Korea and Indonesia equities
We are downgrading South Korea from Neutral to Underweight given the headwinds facing the Korean economy.
Within the Korean tech sector, which forms a significant weight in the MSCI Korea Index, we are seeing more foreign funds outflow and are cautious of the softening PC and smartphone markets within the hardware segment, and the potential impact they could have on memory demand. This is likely due to the broader macro headwinds such as rate hikes, inflation and geopolitical risks.
Operational complexities could also arise given the lengthening supply lead times for companies to receive critical semiconductor equipment due to bottlenecks. Within the internet space, we believe that higher-than-expected costs could start to weigh on operating profits. In our view, wage hikes driven by inflation and competition for talent appear to be the common thread across a number of companies. As such, we think this theme could start to be reflected in a meaningful way in management commentaries moving forward.
We are also downgrading Indonesia from Overweight to Neutral. Indonesia has strongly outperformed the MSCI World Index since our recent upgrade. Given weaker growth prospects, however – in part due to the wider ban of palm oil exports to include crude palm oil and refined products which would impact export revenue – and less compelling equity valuations following the recent outperformance, we downgrade our rating for Indonesia to Neutral to lock in gains.
Long term prospects for China and Singapore equities remain firm
The recent disappointing set of stimulus measures from China led our macroeconomics team to lower our 2022 GDP growth forecast for China from 5.5% to 4.8%.
Broadly, we believe that Chinese policy makers will find it difficult to achieve its trinity of goals: 5.5% GDP growth, zero Covid cases, and limiting the leverage in its economy, especially if the People’s Bank of China further rations stimulus in view of the inflation and currency risks arising from a divergence in monetary policy versus the Fed.
While this weakens the thesis for our overweight position in Chinese equities at the margin, we see our long-term thesis to be broadly intact given overly depressed valuations and a still-constructive long-term outlook.
Outside of Greater China, we continue to like Singapore for its relatively defensive nature and higher dividend yield. Singapore recently announced the further easing of its community Safe Management Measures (SMMs), such as the elimination of group size limits, simplification of its Vaccinated Travel Framework and capacity limits being lifted for all events except nightlife establishments. This came into effect on 26 Apr 2022 and should help to support its international reopening and economic recovery.
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