Asset Class Views for H2 2022
Markets are expected to remain volatile for the rest of 2022. We are selective within equities and fixed income due to rising interest rates led by the US Federal Reserve (Fed) and slowing global growth.
Align your portfolio to your risk appetite using our Risk-First approach to avoid taking more risk than you are comfortable with, and consider holding some cash for future market opportunities. Opportunistic investors can consider investing in our selected high-conviction calls for Tactical investing.
Equities
(ex-Asia)
Remain positive on Asian equities ex-Japan and Japan equities – both have cheaper valuations of 12.0x and 11.9x PE vs US equities at 15.8x PE.
As their respective economies have lagged in post-pandemic reopening, Asian equities will generally benefit from a pick-up in economic activities. However, caution is advised for China, due to downside risks from possible sudden COVID-19 lockdowns and regulatory tightening. Investors are advised to spread risks across a diversified Asian basket while adopting a longer time investment horizon for mainland China.
European equities are cheap (11.6x PE) but the Ukraine conflict may dampen the economic outlook and corporate earnings growth due to the impact of higher energy and food prices on consumer spending. Hence, investors should exercise some caution.
Valuations in the US are high, which account for persistent fears of potential sharp drawdowns. Opportunities can be found in value sectors such as Financials, which will benefit from the rising interest rate environment. Be selective within growth sectors as they tend to be more susceptible to rising rates, and look out for quality assets that thrive on long-term trends to drive portfolio returns.
Remain neutral towards Emerging Markets ex-Asia. Other than Russia, oil-exporting economies stand to gain from higher commodity prices and a stronger USD. Challenges, however, remain from the need to tackle inflation with monetary tightening policies.
Fixed Income
The outlook for Developed Markets fixed income is clouded by expected interest rate hikes needed to calm inflation concerns.
Avoid government bonds as they are the most vulnerable to rate hikes, which also expose High Yield bonds to higher chances of defaults. Rates are expected to increase across the yield curve, which makes short-duration bonds a better defensive play.
Investment grade (IG) bonds offer a good balance of risk, return and income generation in the current uncertain environment. IG issuers should be able to maintain steady coupon payments as the global economic recovery continues to lift corporate earnings. Seek and hold quality IG bonds for long-term income.
Income investors can consider diversifying income streams outside of fixed income to real assets like property, as well as dividend equities.
Currencies and Commodities
The USD is expected to strengthen further as the Fed hikes interest rates and shifts to quantitative tightening measures which raise borrowing costs. The EUR and CNY will weaken against the USD amid concerns over slowing growth. The AUD may firm up on the back of higher commodity prices.
Stay positive on gold which is expected to reach US$2,000/oz by end-2022 due to its safe-haven status amid commodity-driven inflation fears and geopolitical tensions, but near term upside is limited by a strong USD. Brent crude oil is expected to rise to US$130/bbl towards end-2022 amidst ongoing supply disruption and falling inventories.
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