Year of the Tiger
With uncertainty hanging over markets, investors need to tread carefully in the Year of the Tiger. But as Ninety One’s investment professionals explain, there are abundant opportunities too.
Chapters
Macro assumptions
- Growth expectations have adjusted but surprises could still be to the downside. The effects of China’s policy tightening from early in 2021 and the attempts to cool the important property sector will continue to impact growth in the first half of 2022.
- Easier credit conditions. The process of easing credit conditions has started modestly. We expect that downside risks to growth will prompt a progressively more aggressive policy response.
- Back-pedalling on four of the five ‘policy pivots’ (see ‘Domestic policy’ for more on the pivots). Most of China’s five key policy shifts are expected to play out over the next 10 years. But four of them are likely to take a back seat in 2022 as the authorities’ priority shifts towards growth stabilisation. The one exception is environmental investment, which is a candidate for intensification to support growth.
- A weaker current-account surplus. Somewhat slower global demand and less demand for COVID-related goods in particular (where Chinese exports have been focused) will remove a big tailwind to China’s exports and to the Chinese currency. Eventual re-opening will revive capital outflows resulting from international travel.
- Stable consumer price inflation (CPI) and a sharp decline in producer price inflation. Chinese CPI is expected to remain stable at 1.5-2%, but producer price inflation is likely to moderate more rapidly than expected from elevated levels (from 13% now to 0% at the end of 2022), as we see the impact of weaker domestic and global demand and easing global supply constraints.
- A softer currency. The current strength of the CNY is expected to moderate over the year as monetary policy and relative growth rates between the US and China diverge, and the latter’s current-account surplus moderates. The arrival of a digital CNY has no immediate investment relevance.
Specific risks
Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
General Risks
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.