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Expect 'a year of two halves' amid reopening, inflation: UBS

Jovi Ho
Jovi Ho1/20/2022 07:06 PM GMT+08  • 6 min read
Expect 'a year of two halves' amid reopening, inflation: UBS
“The second half will see reopenings complete, excess savings mostly spent, and emergency stimulus measures withdrawn."
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Swiss bank UBS sees 2022 as a “year of discovery”, as “normal” growth rates and inflation emerge after two years dominated by the effects of the pandemic.

“As pandemic-related drivers of economic growth begin to subside, we embark on a journey of discovery to see whether we are entering a new longer-term economic regime,” says Mark Haefele, global chief investment officer at UBS Global Wealth Management.

US inflation, for example, accelerated to 6.8% y-o-y in November, the fastest pace since 1982. He attributes this inflation spike to an exceptional surge in demand for goods that supply has been unable to meet owing to shutdowns.

Speaking at the UBS CIO Year Ahead Outlook 2022 on Jan 6, Haefele adds that some of the worst cases of inflation have already started to normalise. “We think that as demand shifts back from manufactured goods towards more services as we reopen, then we’ll get to a new supply and demand equilibrium and a lot of this inflation pressure will subside in 2022.”

Haefele: We’ll get to a new supply and demand equilibrium and a lot of this inflation pressure will subside in 2022

See also: Holding cash will be a winning strategy in 2023, investors say

As 2022 unfolds, UBS expects “a year of two halves”, starting with sustained growth powered by continued reopening dynamics. “But the second half will see reopenings complete, excess savings mostly spent, and emergency stimulus measures withdrawn, so we expect growth to normalise at lower levels,” says Haefele.

Come end 2022, UBS expects S&P500 to hit 5,100 points, representing an upside of around 7%.

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Haefele also highlights today’s “winners from global growth” to investors. These include equities from the Eurozone, Japan, financials, US mid-caps and commodities and energy stocks.

He adds that fears around inflation tend to increase the correlation between stocks and bonds.

“That speaks in favour of ensuring portfolios are diversified not only with stocks and bonds, but also with alternatives such as hedge funds and private equity… we think investors should balance a procyclical stance with exposure to more defensive sectors, such as healthcare,” he says.

As growth slows in the latter half of 2022, healthcare will shine as a defensive sector, says Haefele. “There’s going to be more elective surgeries and other procedures going on [this year]... we see healthcare as cheap, relative to its long-term average, and it also offers structural growth from aging populations, HealthTech and genetic therapies.”

As central banks reduce monetary accommodation, investors need to look for unconventional yield sources to generate income, says UBS.

These include US senior loans, private and synthetic credit as well as active strategies such as sustainable investing and dividend stocks. Investors looking to the US should also position for a stronger dollar.

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“We think a combination of slowing growth, declining Fed asset purchases and reduced US fiscal stimulus will support the US dollar… We also expect gold to suffer from a stronger dollar.” August Hatecke, co-head of UBS Wealth Management APAC, also flagged how sustainability is a growing investment theme, with UBS’s fully discretionary sustainable investment balanced mandate was up 9% in 2021 and 41% in three years.

A different playbook for 2H2022

For a region long touted as the economic powerhouse of the future, Asia last year “greatly underperformed” global markets in both stocks and bonds due to the conservative management of Covid-19 and China’s policy overhaul, the evolving Omicron situation and challenging China’s growth, notes Tan Min Lan, head of Asia Pacific Investment Office at UBS Global Wealth Management’s chief investment office.

Asian earnings have remained strong and are likely to rise another 10% this year.

Says Hatecke: “In China, we at UBS think that the worst may be over. GDP growth will remain soft in the first half, but easing headwinds and further policy support will lead to a stronger second half in 2022.”

Developed markets will deliver unusually strong performance relative to emerging markets in the first half of 2022, adds Haefele. “In the second half of the year, however, we’re going to be looking for emerging markets to once again deliver stronger growth compared to developed markets.”

Haefele also expects Japan to relax Covid-19 restrictions this year. “At that point, we’re going to see stronger domestic growth in Japan, improved investor sentiment, and there’s still relatively loose monetary policy, which should weaken the yen in Japan. That can also help stimulate Japanese equities.”

Tan remains positive on Asia ex-Japan equities with a preference for sectors and markets with reopening potential, quality cyclicals and winners of secular trends. Sectoral picks include energy, transport, financials, discretionaries and Asian sports supply chain, as the logistics disruption eases.

“Asian earnings have remained strong and are likely to rise another 10% this year, which would put earnings level some 40% higher versus the end of 2020,” says Tan. Valuations are cheap, she adds. “Asian equities now trade at a 45% discount to global. The maturity of Asian high yield is now 8.4% versus 5.2% for US high yield.”

While borders will take a while to fully reopen, consumer sentiment and investment intentions are starting to rebound in Southeast Asia and India, as domestic activities increasingly normalise, she adds.

‘Good news’ for Chinese tech

UBS may favour Asia’s leading diversified internet platforms, online gaming in China, foundries and memory plays, but what of China’s many crackdowns last year?

Last year, China tech was down around 40% to 50%, says Sundeep Gantori, equity strategist at UBS Wealth Management. “I fully agree that the regulatory risk has peaked but that doesn’t mean that there are no regulations. Incrementally, the risk around regulations is limited.”

We are seeing a sequential recovery for China tech, which may last for the next two to three quarters

Chinese tech companies could see an inflection point as they disclose their 2021 financials. “The good news is that the pace of revisions, or negative revisions, has slowed down, and any sign of stabilisation or even improvement would lead to a significant recovery,” he adds.

Chinese tech companies’ earnings have been down sequentially every quarter on an absolute basis. “The good news is that in the second quarter of 2022, for the first time in almost four to five quarters, we are seeing a sequential recovery for China tech, which may last for the next two to three quarters.”

In addition to Chinese Internet names and companies with stable revisions, Gantori highlights opportunities in the Chinese semiconductor and 5G supply chains. “Last year, we talked about semiconductors as a big beneficiary in the early stages of cyclical recovery; that has played out very well.”

Is it now time to get out of semiconductors? “I believe that opportunities in the semiconductor supply chain are there but on a select basis,” says Gantori. “For example, we like companies in the semiconductor supply chain with upside to capex. You will see that from the next one to two weeks when companies will start to report results…The upside for the overall semiconductor supply chain was largely seen in 2021. Incrementally, I would position for mid-cycle opportunities.”

Photos: Bloomberg, UBS

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