That was the constant refrain used by Dato’ Teng Chee Wai, Managing Director of Affin Hwang Asset Management when sharing his views on markets at a recent online webinar held on the 11th December.
“2022 is set to be a year of transition for markets as investors contend with normalisation of growth rates and monetary policy tightening. We expect to see a lot of crosswinds and periods of transition especially with regards to policy.
“While we don’t expect a rout for markets like during early-2020 at the height of the pandemic or 2008-GFC, some form of correction is anticipated. In fact, Asian stock markets have already started consolidating,” Teng said in the webinar which saw more than 1,500 attendees.
Foremost, markets are angsty about slowing growth rates which are projected to come down in 2022. Since reopening from the great lockdown, GDP data and earnings have vaulted strongly as businesses clamber to make up for lost time and meet renewed demand.
Teng adds that such supernormal growth rates is partly an aberration because of the distortion caused by the pandemic. As such growth rates are expected to come down from such high levels, though should still remain above trend.
Earnings growth rate will also normalise and is expected to average between 6%-9% globally in 2022.
Policy & Pandemic
Another key flux for markets to adjust is tighter monetary policy conditions as global central banks look to start turning the taps to reduce liquidity.
After injecting blockbuster stimulus to keep the economy afloat during the pandemic, Teng believes that some form of policy tightening is imminent as central banks seek to tamp down inflation.
“Based on what we are seeing today, clearly the balance sheet of central banks have peaked. As we all know, a lot of the market movements have been supported by abundant liquidity and easy money pumped in by global central banks.
“As liquidity dries up, there will be certainly be an effect on markets as well an adjustment period. Central banks in emerging markets have already begun tightening and developed markets are expected to follow suit next year,” Teng said.
At its recent policy meeting in December, Fed Chair Jerome Powell declared that inflation was a key risk to economic growth. He also signalled to markets that the Fed would speed up its tapering of bond purchases that would pave the way for 3 rate hikes in 2022.
Teng also pointed out that inflation has become not just an economic problem but also a political one in the US.
“The popularity of US President Joe Biden is inversely correlated to inflation data. As such there is also some implicit political pressure to do something,” he adds.
On the debate whether inflation is transitionary or persistent, Teng believes that easing supply bottlenecks and lower commodity prices will eventually help cool down inflation.
He also pointed out that should Omicron turn out to be more destructive that what the market anticipates, there could be room for the Fed to adjust their policy and hold back from tightening too much.
China - 2022’s ‘Wild Card’
Shifting gears to Asia, Teng also addressed the elephant in the room that is China which has been battered by regulatory headwinds. In the past year, the Chinese government has cast a wide regulatory dragnet that has targeted a range of sectors including education, technology, and e-commerce.
These include stock market darlings like Tencent and Alibaba which suffered heavy losses as the government seeks to regain back control from the internet giants. However, recent policy signals by Beijing suggest that the worst of the tightening cycle is over.
“The focus of policymakers in Beijing is shifting from that of regulatory tightening to now supporting growth. China’s economy is seeing signs of slowing down especially the property sector which forms a large component of GDP growth.
“We expect this to elicit some form of policy response by the government to ensure stable economic growth especially heading into its 20th Party Congress in 2022,” he tells audiences.
This was evident at a recent Central Economic Work Conference held in early-December, where top leaders in China repeatedly stressed the need for ensuring economic stability.
Policymakers are seeking to counter the effects of weaker demand, supply chain disruptions as well as a slowdown in the property sector.
“China’s stock market will be one of the wild calls for 2022 after its sharp fall. It will remain a liquidity-driven market where the losses can be significant if conditions tighten.
“However, it can also potentially surprise. My view is that China is a 2H’2022 story. Though, this is dependent on how the government reacts to the various challenges the economy is facing,” he said.
“The risk is also that policymakers make the mistake of tightening too early and too much in the early stage of the recovery. Though, our read is that central banks are erring on the conservative side due to the lingering effects of COVID which could persist, unless we find something that significantly breaks through and the world can really move on from the pandemic,” he said.
On inflection points, Teng sees retreating inflation and a less hawkish Fed as potential turnarounds for the market to improve. He adds that Asian markets could see stronger support on the back of policy easing by China.
“Beijing needs to show leadership on policy easing in Asia and be able to convince markets that it is responding to the reality on-the-ground that its economy is slowing down more than expected. Once we see these inflections points turning and market conditions improve, we could deploy more,” Teng concludes.
