KBank Private Banking (KPB) joined its strategic alliance, Lombard Odier, in organizing an online seminar titled, "Back to Growth as We Know It?", to provide insights on the global economy, which has seen decelerating growth of late. Despite positive factors from easing monetary policy and post-lockdown resumption of economic activity, investors have become concerned about stagflation, an economic trend characterized by slowing economic growth amid rising inflation. Investors are thus recommended to prepare by adjusting their strategies in step with global trends to maintain sustainable portfolio returns. Such perspectives were shared by professionals from Lombard Odier who are well-versed in global economic and investment strategy.
Mr. Jirawat Supornpaibul, Private Banking Group Head, KASIKORNBANK (KBank), noted the major events that have affected the MSCI All-Country World Index during 2021, which are as follows:
- The GameStop phenomenon: The company's share price spiked almost 900 percent within a period of two weeks after retail investors waged a battle against hedge funds, resulting in huge losses among giant hedge funds in the market.
- Accelerating inflation that may prompt the Federal Reserve to hike interest rates sooner than expected: Amid rising inflation, bond yields rose steadily during 1Q21. As a result, anxiety was rife in the market that the Fed might adopt a tightening monetary policy sooner rather than later, which could put a cap on the economic recovery. However, such concerns have faded lately as the market has embraced the view that the surging inflation is just a temporary phenomenon.
- Archegos Capital and its overleveraging: This hedge fund borrowed funds for excessive speculative trading and defaulted on its margin calls. The news shook many banks that were involved with this hedge fund and faced enormous losses.
- Delta variant outbreak: The spread of this highly-transmissible COVID-19 variant caused the number of infection cases to soar once more, thus pressuring the economic recovery. As evidenced, private spending saw a contraction, and the tourism sector remained fragile.
- Measures to rein in private enterprises by the Chinese government, especially large tech companies, including those in the e-commerce sector, education, and online games: The authorities aim to reduce the monopoly status of powerful Chinese firms to ensure a level playing field and fair competition, and to reduce inequality, while also enhancing consumer data security, as part of China's "common prosperity" initiatives.
- Decisions of the FOMC meeting: These turned out to be neutral, signaling that reduction of asset purchases may occur from November to mid-2022, while interest rates were left unchanged at 0-0.25 percent. Interest rates will likely increase in 2022, which is sooner than previously expected, resulting in the US 10-year bond yield rising to over 1.4 percent once more. However, the Fed may delay any tapering if the Delta variant of COVID-19 Delta has a further significant impact on the economy.
- Concern over the potential China Evergrande default: This has caused serious concerns in the markets centered on the possibility of an extensive domino effect. Such concerns triggered heavy selloffs in bond markets and in Chinese stocks.
At present, economic activity has somewhat resumed its normal pace as the COVID-19 situation in some regions has improved, especially in the US and Europe where economic recovery and growth are evident. However, investors remain anxious over stagflation, in which inflation surges alongside an economic slowdown. Amid the prevailing situation, KBank Private Banking and Lombard Odier remain positive regarding the overall global economy in the upcoming quarters and for many years to come.
Ms. Siriporn Suwannakarn, Managing Director - Private Banking Financial Advisory Head of KBank, added that the world economy is not in a dangerous position, but is entering a cycle of normal growth as the crisis passes, given the following seven key reasons:
- The economy is recovering before attaining the pre-crisis levels, as growth will returns to normalcy and more stable momentum is gained. The world economy is stepping into a new phase of recovery with robust growth, as a recovery that is initially too rapid and strong will be followed by a slowdown in order to attain a normal level.
- The most critical period of Delta variant contagion has already ended. This variant mostly hit Asia and emerging nations. Meanwhile, in the US with efficient vaccinations, the numbers of infected persons and hospitalized patients have been on the decline, but the employment market has been seriously affected, particularly in the tourism and hotel businesses where the number of newly employed persons dropped from 500,000 per month to zero in August. However, we believe that with efforts to accelerate vaccinations in emerging nations, the world is on the right path.
- Based on healthy fundamentals of the business sector, profits are higher than expected and companies are capable of investment and employment, while spending demand is pending. Corporate profits in the US have hit record highs, as well as in Europe and some Asian countries. Such high profits will contribute to stronger job markets, pay rises, increases in consumption and more investment. In addition, pent-up demand has resulted in higher consumption than the pre-COVID-19 period, and such demand will eventually shift to the service sector.
- Massive fiscal support has continued to buoy global economies. Although large-scale infrastructure investments in the US may take considerable time to be approved by Congress, their cost of several trillion US Dollars will be a crucial economic driver. We will also witness similar government-driven stimulus measures in Japan under the new prime minister and in Europe under a new administration after last week's elections. We expect to see continual investments from many governments for several quarters from now.
- Inflation concerns are easing. The recent rise in inflation was caused by temporary factors and last year's base of comparison due to the COVID-19 crisis. These factors will gradually fade out. In addition, inflation has not occurred in the loan market, as the amount of bank loan extension and borrowing of households and private businesses have not accelerated. Meanwhile, stable inflation in the long term is supported by the employment market, wages and rents that will slowly rise in line with the economic cycle over the next few years, which will not be sufficient to pressure central banks to increase interest rates.
- Monetary policy support will likely be scaled back in a gradual and flexible manner if economic figures show any sign of weakening or do not meet prior expectations. The Fed still has the flexibility to delay any change to its asset purchase plan. Lombard Odier expects that the Fed will begin trimming asset purchases in 2022 and raising interest rates in 2023. Such actions will be undertaken gradually. As the Fed's monetary policy will remain relatively accommodative, it may continue to support the economy going forward.
- China has adequate monetary and fiscal capacities to avoid the worst economic downturn, although markets are being pressured by Evergrande's debt default issues and Chinese authorities' controls on private companies. Lombard Odier believes that the Chinese economy will not experience a hard landing because the relevant authorities have numerous tools in place to support the economy, including monetary and fiscal policies to sustain the Chinese economic recovery. Therefore, the Chinese economy will likely see a soft landing instead.
Dr. Tripol Phumiwasana, Managing Director - Private Banking Business Head of KBank, said that as the global economy is seen as growing at a slower rate towards normal growth after an initially rapid recovery, KBank would like to recommend seven investment strategies, as follows:
- Maintain a positive view towards risk assets, particularly value and cyclical stocks. At the latest online seminar, Lombard Odier advised that investment should be focused on cyclical and value stocks for bargain hunting during the early phase of the economic recovery. This is a sound strategy because global economic conditions at this time are favorable, and bond yields are on an upward trend, thus supporting cyclical and value stocks. One of the regions that will benefit from these stocks is Europe.
- European stocks will offer favorable and sustainable returns. During the COVID-19 crisis in 2020, European stocks picked up at a slower rate than those of other regions. However, we believe that European stocks will continue to perform well from now on due to: 1) Sentiment after the general elections in Germany will help support European stocks and the Euro's value, although the issuance of additional German bonds may pressure prices. Since the coalition government will likely include the Greens, it will help promote investment related to climate change; and, 2) the European Green Deal will create ample investment opportunities.
- Caution is being maintained towards government bonds. Lombard Odier expects that the Fed will begin reducing its asset purchases by USD15 billion a month from December 2021 to June 2022. Given this, we are of the view that US Treasury yields will increase to 2.25 percent by June 2022, from the reference level in the futures market at 1.69 percent, and the current level of 1.5 percent
- Investment in China will offer exceptional returns. In the worst-case scenario, if Evergrande were to lose all the principal from its unsecured loans, Lombard Odier assesses that the Chinese banking sector would still be robust enough to withstand the possible debt default of Evergrande. In the base-case scenario, we are of the view that the Chinese government has sufficient tools in place to support the company, avoid a broad-based economic impact, and ensure that the Evergrande saga will not be a repeat of the collapse of Lehman Brothers. Solid Chinese debt instruments, including government bonds and debentures, continue to offer viable investment options compared to those of developed nations. Chinese debt instruments offer greater returns than US debt instruments of the same tenor by as much as 1.5 percent, which is relatively high amid low interest rates. The Yuan is set to strengthen compared to the greenback, as well.
Additionally, we took the opportunity to invest in Chinese stocks 2 to 3 weeks ago when there were market selloffs
- Private assets can generate increased return on investment although they may come at the cost of low liquidity. Meanwhile, public assets offer lower return on investment than they did two to three years ago. On average, private equity can generate up to 2.7 percent more return on investment than listed shares, which are suitable for long-term investors.
- Infrastructure investment has benefited from continual capital inflow and government policies. Since 2010, there has been a surge in infrastructure investment. Moreover, investment has accelerated significantly of late, supported by President Biden's 2 trillion USD infrastructure plan. As prices of infrastructure funds still lag behind overall stock prices, KPB expects to see their stellar performance in the upcoming period, thus generating attractive returns.
- Investment in companies that prioritize action against climate change will offer solid returns over the long term. Based on the most recent assessment report from the Intergovernmental Panel on Climate Change (IPCC), the UN Secretary General stressed that climate change is a major issue for humanity, and that it will be further discussed at this year's COP26 UN Climate Change Conference in Glasgow. We at KPB believe that companies capable of adjusting to climate change trends would reap sizeable returns on investment in the future, since companies that fail to make the proper adjustments would not only contribute to global warming, but also run the risk of being prosecuted.
Mr. Jirawat Supornpaibul, KBank Private Banking Group Head, said that amid the current market conditions wherein the economy is undergoing recovery post-lockdown, KBank is supportive of long-term investment diversification into varied asset classes to reduce short-term volatility of investment portfolios. KBank has continually adjusted strategies and investment advice to ensure consistent returns for investors, focusing on the theme of "Policy Driven for a Better World", which will benefit from infrastructure investment plans and green business trends. Emphasis will also be given to the theme of "Laggard and Cyclical Upturns" that prioritizes investment in industries or companies expected to profit from reopening programs, and stock prices in countries like Japan which remain below those of other regional players.
Source: Kasikorn Bank