Timing the precise bottom in global equities remains difficult. However, we would take comfort from three factors. First, a Fed hiking cycle appears to be well-priced. For 2022, for example, four Fed rate hikes are already priced in and the market narrative is questioning whether more hikes are likely. We think expectations have overshot and expect the Fed to hike only thrice as growth slows towards trend in H2 and inflation and supply chain pressures start to ease.
Second, despite the ongoing inflation debate, long-term inflation expectations have actually fallen to their lowest level in almost a year. If the Fed’s goal was to avoid inflation expectations becoming unhinged, this measure suggests it has been successful, buying it some breathing room should growth falter or equity and corporate bond market weakness become excessive. Third, technical charts argue the uptrend has further to go, albeit at an increasingly gradual pace.
All these factors, when placed against the historical context that temporary volatility around the first hike of a Fed hiking cycle is common, mean we would start averaging in now rather than attempting to time a precise bottom.
Is policy turning in China?
The debate in China is the polar opposite to that in the US. Despite several easing measures, PBoC Governor Liu Guoqiang said the central bank would roll out more measures to stabilise the economy. For Greater China equity markets, we believe the shift in policy direction and increasingly supportive technicals point at least to a short-term rebound in indices like the Hang Seng. Longer term, we also favour the industrials and consumer discretionary sectors.
In Asian High Yield bonds, default expectations seem excessive, with market pricing pointing to default rates at the high end of analyst expectations. We continue to see a change in policy direction as a key catalyst – this has started at a macro level in the form of interest rate cuts, but reports suggest more specific measures to support real estate sector liquidity could be in the offing as well.
By Standard Chartered Bank: It is not and does not constitute research material, independent research, an offer, recommendation or solicitation to enter into any transaction or adopt any hedging, trading or investment strategy, in relation to any securities or other financial instruments. This document is for general evaluation only.
