To The Moon

Market participants have been hoping for a global market recovery in 2H22 but have since been disappointed. Equities and fixed income globally have sold off hard thanks to i) Central Banks’ firing aggressive rate hikes in their quest to quell inflationary pressures, ii) recessionary fears and iii) China’s zero covid policy weighing down on sentiments in Asia. That being said, we are finally seeing some positives amidst a challenging macro environment. Markets as a whole were able to build on the momentum in October, delivering investors some good returns in November.

Asset class performance: Both equities and fixed income are in the green.

Both global equities and global bonds have managed to avoid a decline in the month of November. Global equities as gauged by the MSCI World Index delivered returns of 7.06% in USD terms while global bonds as gauged by the Bloomberg Barclays Global Aggregate Index gained 4.51% in USD terms. Such a result has not been witnessed this year as inflation hovering at elevated levels resulted in a series of jumbo-size rate hikes to be introduced by Central Banks’ which in turn dented sentiments.

Delving deeper under the hood, we note that trading within the equity space remains volatile. Equities grinded lower to begin the month as market participants interpreted Chairman Powell’s press conference to be hawkish. However, as the month progresses, positive developments on the US and Euro-area inflation front raised hopes that inflation could perhaps have peaked. In this vein, market participants have built a narrative that Western Central Banks’ will soon moderate the size of rate hikes moving ahead and hence a rally occurred – expectations of market participants have materialized (the Feds signaled that they will slow the pace of interest rate increases in December albeit stressing that borrowing costs will need to keep rising and remain restrictive for some time to beat inflation).

On the fixed income front, movement within the space was largely similar to that of the equity space – yields have played snake and ladder as the initial hawkish Feds commentary saw market participants repricing fixed income assets lower before turning more upbeat on the back of better-than-than expected October US CPI print.

Chart 1: Yields were range bound as market participants reacted to a slew of news developments. Source: Bloomberg

Geographical: Emerging markets take the spotlight

Developed markets (DMs) have been the better performer for the past few months. In the month of November, Emerging markets (EMs) took the spotlight away by delivering significantly better returns compared to their DM peers – the EM Index registered a positive return of 6.49% while the DM Index returned investors 3.57% in SGD terms. The strong performance of EM equities in our view can be attributed to the spectacular returns coming from Chinese equities – the decision by the Chinese government to ease lockdown measures despite the still worsening Covid-19 virus outbreak lifted the sentiments of market participants. Additionally, foreign investors flocking into Taiwanese equities in droves thanks to expectations of slower global rate hikes have also propelled EM equities as the benchmark gauge became one of the region’s best performers in November.

Within the DM space, European equities gauged by the Stoxx 600 Index outperformed US equities as gauged by the S&P500 Index. European equities rally was in our opinion due to a confluence of factors such as i) softer-than-expected US inflation data setting the stage for the Feds to moderate the size of a rate hike – markets expected the ECB to follow suit should inflationary pressure eases, ii) third-quarter earnings strength and iii) China’s plans to ease lockdown measures. In short, these positives have bolstered sentiments.

Chart 2: Vietnam was the only market that experience a decline in November. Source: Bloomberg

Sector: Another month filled with optimism

All sectors managed to record returns in the green for the second straight month, an encouraging sign given the almost yearlong equity market rout. Interestingly, the likes of the energy sector saw the smallest gain in November. The reason for the relatively muted returns compared to the beginning of the year is the decline in oil prices – OPEC+ revising their global oil demand forecast lower for the fifth time since April, citing considerable uncertainties associated with Chinese demand and the global supply outlook has weighed on prices.

On a more positive note, the financial sector that we favor in the prevailing macro environment has notched another month of sizeable returns. Nonetheless, the rally of the financial sector in our view still has legs. Tailwinds such as i) rising interest rate, ii) an acceleration of FinTech trends, and iii) attractive valuations will continue to drive the sector’s return in both the medium and long term.

Chart 4: Oil prices continue to decline but considered elevated compared to the period before the military broke out. Source: Bloomberg

Our thoughts ahead

We do not expect a swift return to the subdued inflation readings witnesses before the twin shock of the pandemic and the war in Ukraine nor do we think that monetary tightening will end this year or early next year. Investors should brace themselves for a bumpy ride ahead and we advocate the tenets of diversification.Pockets of opportunities are still available and the sector we favour at the current juncture is the financial sector. Style wise, we believe that the stars have aligned for the growth style. Supporting our opinion is the fact that valuations have corrected meaningfully and therefore present an attractive opportunity. Furthermore, growth companies are generally less affected by the broader economy’s performance – earnings of cyclical companies should fall off as the economic growth slows.

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