Hou Wey Fook of DBS Bank
“We forecast 4 rate hikes in FY23,” Hou Wey Fook, Chief Investment Officer at DBS Bank, said in an interview to Moneycontrol.
“Nonetheless risks of an overshoot in the FY23 CPI projection, persistence of imported price pressures, higher agricultural input prices, producers’ price increases and global shift towards policy normalisation are likely to convince the central bank to incrementally raise rates from the second half of the year,” he reasoned.
Fook, with 30 years of fund management experience, said India markets could hit a record high in 2022 when global sentiments turn better in the second half from the easing of the Russia/Ukraine crisis and China sentiments improving, lifting the outlook for emerging markets. But India is seen as less attractive compared to other Asia markets, especially China for the following reasons, he feels.
What is the one theme that you are most bullish on globally, and what is the one sector that you want to avoid for 2022?
We are constructive on the global technology theme which encompasses secular trends in semiconductor, electric vehicles, integrated circuit design, and cloud computing. Earnings growth among these firms are projected to outpace the broader global equities over the next few years, driven by ongoing digital transformation and strong pricing power.
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Do you think the US could be facing the risk of stagflation one year down the line, or is it the fear created by experts and analysts considering the current situation, including geopolitical tensions and spike in commodity prices?
We believe conditions prevalent today are different from the stagflation periods seen in the 1970s and early 1980s. Unlike the 1970s, high inflation that we currently see is accompanied by steady macro momentum. While consumption may take a hit if energy and food prices stay elevated for prolonged periods, the latter is however, not our base case assumption.
Longer-term, we believe the shortfall in oil from Russia will be partly offset by higher supply from US shale producers and OPEC.
Are Chinese tech stocks trading at a heavy discount to US tech stocks? Is it the time to go overboard on Chinese tech stocks or stick to US tech stocks?
We maintain our long-term convictions on US large-cap technology stocks, focusing on sector leaders which have pre-existing profit track record, globally diversified revenue mix, solid patent portfolios, and strong operating cashflows.
For China tech, the prevailing valuation discount limits downside risks and this enhances our positive stance on the sector. On a segmental basis, the e-commerce ecosystem and e-sports platforms are beneficiaries of robust domestic consumption.
What is your view on Chinese property markets, especially after we saw the Evergrande kind of situation last year? Are you bullish on the space?
The authorities have encouragingly shifted towards a supportive stance in 2022, which has helped the markets to find some stability. However, we remain cautious as China property bonds will face the largest maturities in Q2 and Q3 this year. With offshore funding markets remaining shut and access to liquidity still tight, we anticipate that there may still be more defaults in the near term.
We prefer to remain up in quality for the sector, while cautiously waiting for a more persistent rebound in property sales as a sign that the bottom is in place.
What is your allocation to India in the Asia Ex-Japan portfolio, and what is the basis behind it? Are you bullish on India?
We are Neutral on India and believe the market should move broadly in line with the region as external geopolitics and global monetary tightening moderates risk appetite. Hence, we believe domestic drivers are key performance differentiators among the markets in the region. India is seen as less attractive compared to other Asia markets, especially China, for the following reasons:
1) The market trades at a 60 percent premium to China, and 40 percent to Asia ex-Japan. Although the premium has narrowed from the high, they are still above the historical average. The narrowing of premium can be alluded to weak market sentiments in China in the past 12 months, hence, funds outflow from China looking to invest in other markets. Hence, we believe with investors looking for value and catalysts, China should be in a better position to attract more interest.
2) The market is sensitive to oil price. Tailwinds from external trade and balance of payments are likely to moderate after two years of strength, with higher oil prices affecting the input bill, translating to a weaker rupee.
3) The market is sensitive to high inflation and interest rate hikes. The Monetary Policy Committee (MPC) is likely to perceive inflationary risks through higher oil as supply-driven and call for administrative measures to offset the impact on inflation as well as real incomes. The bar for policy tightening remains high as uneven recovery backs their growth-supportive stance. Nonetheless, risks of an overshoot in the FY23 CPI projection, persistence of imported price pressures, higher agricultural input prices, producers’ price increases and global shift towards policy normalisation are likely to convince the central bank to incrementally raise rates from the second half of the year. We forecast 4 rate hikes in FY23.
Do you expect Indian markets to hit a record high again in 2022, and why?
India markets could hit a record high in 2022 when global sentiments turn better in the second half from the easing of the Russia/Ukraine crisis and China sentiments improving lifting the outlook for emerging markets. With the pandemic possibly coming to an end in 2022, notwithstanding higher inflation and global monetary tightening, the post pandemic recovery should still place growth momentum higher towards pre-pandemic levels, after having so much stimulus being injected into global economies during the pandemic. India is well-placed to enjoy the post pandemic recovery with its strong domestic consumption base.
Do you think the markets are sensing that oil would fall below $ 100 a barrel immediately after a resolution to the Ukraine situation?
We believe there is a high level of political premium being priced into the oil markets, and oil price should ease after a resolution to the Russia-Ukraine crisis. The futures oil curve is in a backwardation.
Nonetheless, we don’t expect a collapse in oil price as the persistent structural underinvestment in oil price should support a higher oil price, going forward. Our in-house expectation is for oil to average $ 95-100 in 2022.
What are the challenges for the markets globally in the rest of 2022?
The potential challenges to global markets for the rest of 2022 include: (a) escalation in the Ukraine-Russia crisis, (b) overtightening of monetary policies by the major central banks, (c) surprise outcomes in the US mid-term election, and (d) further spike in energy prices.
Do you think the markets are fast shifting their focus to US Fed from the Ukraine situation, and what could be the total quantum of rate hike by the Fed at the end of 2022?
The markets will continue to have their eyes on both developments, given that (a) expectations for both have continued to evolve, and (b) they are high-impact events for financial markets. The Fed has and will continue with their hawkish rhetoric in light of inflation coming in at 30-year highs, given that their mandate requires a response to maintain domestic price stability primarily, more so than to address international geopolitical concerns. DBS expects the upperbound of the Fed funds rate to end the year at 2.5 percent.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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