2022 Asia Investment Forum: Investment strategy in a shifting world

Views expressed as of 23 February 2022. For Thomas Mucha's latest insights on the Russia/Ukraine conflict, please  click here.

Geopolitical tensions

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.

Economic and financial market normalization

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”.

China

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”.