Mr. Jirawat Supornpaibul, Executive Chairman, Private Banking Group, KASIKORNBANK, said that since early this year, capital markets have been concerned about runaway inflation as it would induce the Fed to hike interest rates at more pronounced and rapid rates. In February, the Russia-Ukraine war led to anxiety about shortages of crude oil and other raw materials. The elevated oil prices further exacerbated global inflation that had been soaring for some time. During mid-March, the Fed resolved to raise its policy rate by 25 basis points - the first interest rate hike since 2018. That was as inflationary pressures were just beginning to become apparent. In the latest development, US headline inflation for May accelerated to a 40-year high of 8.6 percent YoY, which was higher than expected. The surge in inflation came mainly from skyrocketing energy prices as China relaxed its lockdown measures. This prompted the market to fear that the Fed might opt for more dramatic rate hikes in order to tame inflation. Under these circumstances, global stocks went into a panic as investors swiftly sold off their risk assets and shifted to cash instead.
Ms. Siriporn Suwannakarn, Senior Managing Director - Financial Advisory Head of Private Banking Group, KASIKORNBANK, added that investment markets are now facing unusual volatility, while returns on various assets have been on a downtrend due to multiple negative factors, including the US inflation rate that has not entered a downward trend per the Fed's target, amid surging energy and service prices. Consequently, US monetary policy has been significantly tightened, as evidenced by the latest Fed resolution to increase its policy rate by 0.75 percent in its meeting of June 14-15, in line with market expectations. At present, the policy rate stands at 1.5-1.75 percent, with signals of more rapid rate increases totaling 1.75 percent in the remaining meetings of this year to reach up to 3.4 percent by year-end, which is higher than the estimate made in the March meeting, As for the overall US economy, its recovery remains strong, while the employment market is in a tight position with the unemployment rate moving towards its historically lowest level. Some negative signs have been seen in the property market, as the interest rate hike has affected consumer purchasing power and therefore lowered home sales.
Meanwhile, China has cautiously reopened their borders after the number of infected COVID-19 persons decreased - a proof of successful lockdown measures. However, increases in infected persons in other parts of Asia have been reported, for example, in Hong Kong and South Korea, which may cause China to resume its zero-COVID measures until the third quarter of this year. If so, global supply chains will be affected once again. Meanwhile, the persistent Russia-Ukraine crisis will also produce adverse impacts on global supply chains. There are three possible scenarios for developments in the Russia-Ukraine conflict that could affect the global economy at the macro level: 1) The persistent war hurts supply chains. The likelihood of this scenario is high. If it were to happen, global GPD growth would decline by 1 percent; 2) The war quickly escalates to an extent that it triggers global geopolitical conflict. The likelihood of this scenario is low. But, if it were to happen, global GDP growth would fall by 2 percent; and 3) The conflict eventually eases. Though this scenario is seemingly out of reach, if it were to happen, global GDP growth would drop by only 0.5 percent.
Dr. Triphon Phumiwasana, Senior Managing Director, Private Banking Business Head, KBank Private Banking Group, said that a significant decline in the Global Economic Index has been seen over the past few months. Since it is approaching a contraction, the world economy could be heading for a recession, thus pushing stock trading into a bear market. In such economic and market conditions, KBank Private Banking and Lombard Odier will continue to place emphasis on diversification. Given this, investors are advised to adjust their investment strategies and portfolios during the second half of 2022, as follows:
Asset typesWeightReasons Cash 2%Back to Under-weightRedeploying cash buffer into IG and credit Fixed Income 36%Reduced Under-weightIG Spreads and yields have improve attractivenessEquities 45%Neutral Equities (Under-weight with puts)Medium term outlook supportive if there is meaningful de-escalation and recession is avoidedValuations have improved and sentiment is clearly bearish, but outflows just startedAlternative assets 17%Over-weight European Real Estate on expectation of value sectors recovringUnder-weight Gold but compensated by Over-weight Broad commodities as diversifer
Mr. Jirawat added that KBank will continue to advise clients to focus on diversification of various assets via mixed funds in order to reduce overall portfolio risk. Mixed funds such as the K-ALLROAD Series, which was unveiled at the end of 2021, has a current size of over 6 billion Baht*. It has garnered favorable response from customers given the prevailing investment and market conditions. KBank continues to advise clients to diversify their investment towards other alternative assets such as private equity funds. The PE funds recommended by KBank Private Banking have generated favorable returns of up to 61.4 percent** and 12.8 percent** for customers' portfolios since their inception.
In addition, during the second half of 2022, KBank also plans to introduce other alternative investment products - i.e. Sustainable Global Balanced, China Sustainable Equity, Global Private Debt, Global Private Equity, Hybrid Global Private Asset, Global and Local Private Real Estate, Quantitative Hedged Fund Strategy, and Exotic Structured Note - to diversify risks and to offer favorable returns for customers' investment portfolios in 2022.
The KBank Private Banking 2022 Mid-year Economic and Investment Outlook seminar titled "Can the Global Economy Pull off a Soft Landing?" can be viewed via https://www.youtube.com/watch?v=XHDoH94KVLU.
Source: Kasikorn Bank
