May 17, 2022
Global markets fell in the first month of 2022, on the back of expectations of more US interest rate hikes than initially expected due to higher inflation numbers and geo political risks due to the conflict between Ukraine and Russia. The US Fed recently provided a road map that showed as set purchases were likely to halt in March 2022, and that they would start to “significantly reduce” bond holdings on its balance sheet. They also mentioned that there was room to raise interest rates without threatening the labour market. The Fed could move on a more aggressive path, indicating further rate hikes 5 times instead of the initial 3. This triggered a sell off in global markets and the S&P500 fell 5.26%, the EuroStoxx down 4.30% while the NASDAQ was down 9%. This also led to investors rotating from “growth” stocks and into “value” stocks. The Japanese yen remained at the 115 level, while the Euro fell slightly to US$1.12. Oil continued rising, up 17.27% to US$91.21/barrel, while gold prices fell slightly to US $1,797 per ounce.
The Hong Kong market performed well after the PBoC cut key rates and the central government boosted infrastructure spending to support economic growth, and the Hang Seng index rose 1.74%. China also lowered its 1-year loan prime rate (LPR) by 10bps to 3.7% and 5-five LPR by 5bps to 4.6%. However, China A shares did not follow the rally in the HK market and fell over the month, with the CSI300 down 7.70%, while the ChiNext fell 12.52%.
In North Asia, the Taiwan and South Korean markets also corrected sharply following the sell off in NASDAQ and the Korean Kospi was down 12.04%, while the Taiwan TWSE fell 3.22%. The Korean market was one of the worst performers in Asia, due to the Kospi’s relatively large tech exposure, and as investors became increasingly risk averse after expectations of rate hikes by the Fed. The Taiwanese market was affected by the sharp fall in the NASDAQ, however, exports rose for the 19th straight month, boosted by sustained demand for semi conductor chips and tech products.
Indian and ASEAN markets performed relatively better than regional peers due to less impact from lower weighting in tech stocks. In ASEAN, the Singaporean, Philippine, and Indonesian markets doing well, up 3.74%, 3.18%, and 0.19% respectively, while the Thai and Malaysian markets fell 0.30% and 4.07% respectively. The Indian market was largely flat, down slightly by 0.22%, as worries on concerns surrounding the Fed’s plans for an interest rate hiked ragged on the market. The Indian Budget introduced several measures as an impetus to growth and the projected increase in capital expenditure to boost public infrastructure bodes well, improving the prospects for growth.
Over the month, we underweight Taiwan and South Korea and increased weighting in the K/China market, where we see cheaper valuations and higher dividend yields. As we mentioned last month, we also added holdings in Japan, Sumitomo Corp and Nomura, as we believe there is upside opportunity in the market, and reduced some tech positions in the US, such as Microsoft and Meta Platforms (Facebook). We also added some low valuation names with high dividend yield in Hong Kong, such as CNOOC, China National Building material, and China Construction Bank.
Looking ahead, given the relatively strong US economic data, high US inflation, and a more hawkish view from the US Fed, we expect global markets will remain volatile in the short term, which may also impact the performance of the Asian markets, especially North Asia. We also expect bond yields will continue to rise, especially in the short end. Nevertheless, we believe HK/China will out perform the region given increasing support from the Chinese central government and we remain positive towards these markets.
Past performance is no indication of future results, please see the end of the document for the Risk Disclosure Statement. All data is as at the end of the month.
The European Commission took a major step towards including investments in gas and nuclear-based energy in the list of sustainable activities under the EU taxonomy classification system, with the publication and presentation of a Taxonomy Complementary Climate Delegated Act proposing criteria and disclosure rules for their inclusion. The EU Taxonomy regulations, which came into effect at the beginning of this year, is part of the EU Action Plan on Sustainable Finance, established by the EU Technical Expert Group on Sustainable Finance (EUTEG). The taxonomy is a classification system enabling the categorisation of economic activities that play key roles in contributing to at least one of six defined environmental objectives, starting with climate change mitigation and climate change adaptation, and no significant harm done to the other objectives.
While gas and nuclear energy are often viewed as transition energy sources that will be required to facilitate the shift from fossil-based power to a greener energy system, their proposed inclusion has met significant resistance from some member states, such as Germany and Austria, along with sustainable investment groups who have warned of challenges to investors as they aim to channel capital towards environmentally sustainable activities.
Previously in the spotlight as the instigators for pushing Hong Kong’s home prices up, many Hong Kong property developers are now introducing ESG initiatives into their company policy, such as social housing and other projects aimed at benefiting the wider society. New World Development became one of the first developers to globally issue a US dollar sustainability-linked bond last year, that is committed to using 100% renewable energy by 2026 in its Greater Bay properties. They, alongside Henderson Land and Wheelock, have also under taken housing projects aimed at lower income groups.
Please note: The commentary us provided by Hamon Investment Group and does not constitute investment, tax, legal or other advice. It is not a recommendation, an offer to sell or invitation to investment. Investment involves risk. Past performance is not indicative to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. Consult your financial advisor before making any investment decisions.