Top Talk | Invesco :How to revisit your investment logic in 2022

The sudden Russia-Ukraine conflict has sent the capital market on a roller coaster ride. We’ve seen great volatility in global capital markets, the surge of gold and agricultural product prices, and not to mention the record-high LME nickel price in the recent 15 years ......

In fact, global stock markets already saw a retracement early this year based on expectations that the Fed and other central banks will phase out the stimulus measures implemented after the COVID-19 outbreak. However, the recent escalation of the Russia-Ukraine conflict is no doubt the key variable that leads to a further shock to the market.

In a volatile market, how would the investment logic evolve in 2022? What impact will the developments of the Russia-Ukraine conflict have on the capital market? Are there any investment opportunities worth noting?

To answer these questions, we’ve invitedMr. Zhao Yaoting, Global Market Strategist at Invesco Asia Pacific (not including Japan)to join us at Futu’s Expert Insights.

1. Large opportunities in the Russian-Ukrainian situation;

2. How to select stocks in the context of geopolitical tension and tightening monetary policy;

3. The current "risk avoidance" coup is full of uncertainty;

Below are the highlights of the session:

Macroeconomic Outlook

In the first quarter of the year, persistently high consumer price inflation in many Western countries coupled with soaring geopolitical risk premia have created uncertainties over major central banks’ monetary policies and increased the potential for central bank policy error.

Over the coming quarter, financial markets will continue to focus on the tragedy in Ukraine. Already, the Fed’s geopolitical risk index has risen to levels not seen since 9/11 or the Iraq war. Concerns over economic and financial sanctions against Russia have led to a selloff in Russian assets, rising commodity prices, and higher volatility.

Thus far, markets have moved towards a risk off stance, but not indiscriminately so. Safe haven assets such as gold, USD and US Treasuries have rallied in response. It’s becoming clear that a drawn-out military confrontation with longer-term economic consequences are a possibility. A soft economic landing is looking less likely.

While trade links between the US, Europe and Russia are relatively weak, the commodities market will be key to the outlook of the global economy.

Inflationary pressures have clearly worsened, largely driven by energy prices as well as other commodity prices due to the Russia-Ukraine crisis. Oil prices have reached a 14-year high and natural gas prices have more than doubled.

US: US stocks have tended to provide positive returns during Fed tightening cycles and we are reminded that this will likely be the case this time around. However, if we believe the FOMC’s GDP growth projections (2.2% and 2.0% in 2023 and 2024, respectively), then we face the prospect of an aggressively tightening Fed and limited profit growth especially given the rise in raw material prices. Hence, I suspect that equity market gains may be limited, especially if it turns out that the Fed is being overly aggressive.

There is also very limited trade and investment between the US and Russia and the White House has for now pledged to only provide limited support to Ukraine. I don't think the US wants to escalate tensions with Russia that could result in either American boots on the ground in Ukraine or a complete curtailment of Russian energy supply to Europe. If either were to occur, then global risk assets would come under pressure. For the time being, I think the conflict will continue to grind on as a proxy war for a while with possibly more sanctions and counter-sanctions. Despite the recent rally in equities, I still think that the heightened geopolitical risk premia coupled with rising inflation in the West could periodically unnerve market participants and that investors should remain well-diversified.

A-shares: Recently, Chinese Vice Premier Liu He essentially promised the rollout of market-friendly pol icies that should bolster economic growth. He also said that any regulatory actions should be better coordinated and should not threaten stability,

'All policies that have a significant impact on capital markets should be coordinated with financial management departments in advance to maintain the stability and consistency of policy expectations.'

I would expect more transparency and less surprise around upcoming regulation, but also less actual regulation going forward — and, in general, policies that support growth and help the Chinese economy achieve its goal of a 5.5% growth rate.

The speech from China’s Vice Premier is an important development, and investors reacted accordingly, bidding up Chinese stocks and erasing some of the losses experienced in previous weeks.

I remain cautiously optimistic on Chinese stocks, anticipating that fiscal and monetary policy winds should prove to be effective tailwinds for the economy.

Fundamentals remain strong and even after the recent rally valuations remain attractive relative to historical levels. I favor stocks that have high barriers to entry and those that are making use of new technologies such as artificial intelligence (AI) and Internet of Things (IoT) as well as autonomous driving. I would avoid sectors that are still under regulatory scrutiny as “common prosperity” is still very much a priority for policymakers.

While the US rate hiking cycle and associated uncertainty could create some ripple effects on China A-share markets, the overall impact should be small as China is still in the loosening cycle with low inflation pressure.

H-Shares: Chinese tech companies listed in Hong Kong have also rallied strongly after the Vice Premiers’ speech to stabilize the market. They stand to benefit meaningfully from supportive policies and incoming monetary easing as high growth stocks. That said, delisting concerns for those with dual listed ADRs are still top of mind for investors.

On domestic HK companies, HK banks are key beneficiaries of rising rates (HK imports US monetary policy due to currency peg). Share repurchases have become more popular, as many HK companies are trading at historical lows without imminent capital deployment opportunities.

The geopolitical conflict in Ukraine and the likely policy responses to it continue to be one of the dominant drivers of market volatility. The conflict appears likely to be a drawn out affair, with possible tit-for-tat responses. It’s possible that hostilities could get worse before they get better. While geopolitical risks will remain elevated, I would expect markets to start to recover as the global economy adjusts. Volatility, even intraday, has materially increased for both equities and bonds this year, but we have not seen panic moves and capitulation.

On the US monetary policy, Powell recently said the Fed must move'expeditiously' to get to the neutral rate, leading the market to speculate 50bps hikes through the year. I believe the Fed is'talking tough' to ensure that longer term inflation expectations are well-anchored, in hopes that it doesn’t have to follow through with aggressive tightening.

The Fed must be careful to walk a tight line to avoid the risk of choking off the economic cycle. I expect markets to continue to experience volatility from repricing of rate hiking expectations through the year.