Skip to main content
- Funds
- Insights
- About Us
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
As vaccination programs continue globally, and as economies verge towards pre-pandemic normality, new risks are occupying the thoughts of investors and investment managers. At the Wellington Management 2022 Asia Investment Forum, speakers identified three megatrends they believe will significantly influence investment decisions during the year:
“We believe all three will be the most important drivers within the financial markets this year”, asserts Multi-Asset Strategist Nick Samouilhan. “We’re now in a world of great power dynamics”.
Views expressed as of 23 February 2022. For Thomas Mucha's latest insights on the Russia/Ukraine conflict, please click here.
According to Thomas Mucha, Geopolitical Strategist, power competition between the world’s largest and most influential nations will equate to greater geopolitical risk. Countries throughout the region are joining various alliances and economic pacts designed to bolster national security and shore up supply chains that were severely disrupted during COVID-19 lockdowns.
In the Asia-Pacific, two camps are emerging: those siding with the US, and those aligning with China. The reintroduction of the Quadrilateral Security Dialogue between the US, Japan, Australia and India, and the recently established AUKUS alliance between the UK, US and Australia emphasise the importance the US places on the region. Conversely, China’s slew of deals as part of Belt and Road Initiative underscores the nation’s regional and global ambitions. “Expect more coordination, and a deepening use of US-led alliances and security formats to attempt to moderate Chinese military actions in the Indo-Pacific”, says Mucha.
Both sides are focusing on the development of strategic industries that are on the front line of both military and economic advancement. These include semiconductors, next generation communications, robotics, artificial intelligence and quantum computing. They also include biotechnology, space technologies and rare earth minerals. Defense spending across the region is on the rise, having increased by 2.8% during 2021.1 Some countries have upped their defense budgets by more than double this number. Mucha expects regional defense spending to grow further in the coming years.
“The investment focus will shift to these dual-use technologies, and our concepts of what constitutes a defense stock will change accordingly”, says Mucha.
We’re entering the most complex, politically dangerous and unpredictable geopolitical environment in decades.
For Juhi Dhawan, Macro Strategist, 2022 is the year of normalisation. This not only applies to the real economy as we verge further towards a full economic recovery, but also in terms of inflation. As such, she expects central banks to start to move away from the accommodative measures that have been in place for the past two years.
Present-day inflationary pressures are noteworthy. In the US, for example, while Flexible CPI — the indicator that tracks the price of items that frequently rise and fall like food or energy — is currently at an all-time high, policymakers at the Federal Reserve System are paying particular attention to Sticky CPI — the indicator that tracks items that are typically subject to incremental price changes, like health care or household goods. Sticky CPI has risen by more than 2% in the past 12 months.
Flexible CPI should cool soon, believes Dhawan, as bottlenecks in supply chains ease.
US employment numbers and wages are also in pre-pandemic territory, thus underscoring the normalisation of the nation’s economy. Dhawan expects many stocks to prioritise bottom-line expansion over top-line growth during the year. “Look for companies where earnings matter, rather than thinking about expansion, because this will be quite an important shift for markets moving forward”.
2022 is the year of normalisation, where growth converges across the world, and central bank policy starts to move away from its accommodative stance towards something approaching fiscal control.
Economic growth is also expected from China. Samouilhan believes the nation’s priority is stability rather than economic and financial market reforms. “China is focusing on stable growth, as opposed to fundamental reform underneath the surface”.
As such, a new growth cycle should commence. While some think it is too early to make this prediction given that new COVID-19 outbreaks continue to emerge, Samouilhan is of the opinion that China is well equipped to manage and overcome these. He also notes that much of the Chinese economy is goods-orientated, making it less susceptible to disruption brought about by lockdowns. For these reasons, investment managers are increasingly viewing China as a separate entity to other emerging markets when constructing portfolios, Samouilhan says.
In terms of competition with the US, much will depend on what is said by both American politicians in the lead-up to the midterm elections later this year, and by their Chinese counterparts during the 20th National Congress held about the same time. Mucha expects anti-China rhetoric from both Republican and Democratic candidates. “The US political calendar will intensify strains in the US-China relationship,” he says. “It also means the Chinese government is likely to be more sensitive to actions taken by the United States Congress”.
Mucha predicts further disentanglement between the two nations in the coming years as they strive for superiority economically and militarily across a whole range of industries. “From an investment perspective, the challenge and opportunity will be to identify which of these sectors has the policy priority, and then allocate capital accordingly”, Mucha adds. “Firms that are able to marry these top-down macro trends with bottom-up analysis are likely to do well in this environment”.
The focus is not on reform, but stability this year.
Four investment perspectives amid a pivotal US election
How can investors reposition portfolios for a pivotal but highly unpredictable US elections? Nick Samouilhan explores potential avenues in conversation with three leading portfolio managers.
Chart in Focus: Four key areas of opportunities in bonds amid Fed uncertainty
We discuss four key areas of opportunities in fixed income amid Fed uncertainty in the second half of the year.
Time for credit selection to shine
Fixed income investors continue to seek answers to an era of volatile rates. Large, static exposures to credit markets no longer cut it. Instead, a nimble and dynamic approach is more likely to create resilient and consistent total return outcomes.
Capitalizing on rate shifts: Parsing opportunities in the second half
Fixed Income Portfolio Manager Campe Goodman and Fixed Income Strategist Amar Reganti discuss how to capitalize on potential rate shifts in the second half of the year
Reframing fixed income portfolios: why bond maths makes the difference
It is easy to understand why fixed income investors tend to focus on yields. But investors who focus too much on yield may run the risk of overpaying for income and underestimating the impact of price volatility.
Looking beyond yield: Rethinking the approach of fixed income investing
Investors face a new regime, challenging traditional assumptions about returns and volatility. With central bank interventions impacting credit markets, it’s time to rethink income allocations. Rather than fixating solely on yield, consider a dynamic approach, presented by Connor Fitzgerald.
New era demands a nimble approach to credit
Our expert explains why deep research and an active approach are effective ways for fixed income investors to uncover credit opportunities in today's market.
Chart in Focus: Compelling opportunities in four higher-yielding credit sectors
Portfolio Managers Campe Goodman and Rob Burn share insights on where they are seeing compelling opportunities in high-yielding credit sectors.
Credit: Better opportunities to add risk on the horizon
ur experts review current macro dynamics impacting the bond market and discuss where they see opportunities and risks across credit sectors.
URL References
Related Insights
DISCLOSURE
This material and its contents may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management. This document is intended for information purposes only. It is not an offer or a solicitation by anyone, to subscribe for shares in Wellington Management Funds (Luxembourg) III SICAV (the Fund). Nothing in this document should be interpreted as advice, nor is it a recommendation to buy or sell shares. Investment in the Fund may not be suitable for all investors. Any views expressed are those of the author at the time of writing and are subject to change without notice. Investors should carefully read the Key Facts Statement (KFS), Prospectus, and Hong Kong Covering Document for the Fund and the sub-fund(s) for details, including risk factors, before making an investment decision. Other relevant documents are the annual report (and semi-annual report).
Issued by Wellington Management Hong Kong Limited. Investment involves risk. Past performance is not indicative of future performance. This document has not been reviewed by the Securities and Futures Commission of Hong Kong.