Page 8 - ISQ - April 2022

INVESTMENT STRATEGY QUARTERLY

Q&A: Compelling Opportunities

in Today’s Markets

Tracey Manzi, CFA, Senior Investment Strategist, Investment Strategy

Doug Drabik, Managing Director, Fixed Income Research

Tracey Manzi
Q: Where do you see opportunities in the global equity markets?
move through 2022 for three key reasons: 1) China, the main
A: We think Asian emerging market equities continue to look engine of growth in the region, is returning to a pro-growth
attractive. With monetary policy transitioning toward tightening policy, 2) cheaper valuations should provide a buffer as the
throughout most of the developed markets amid higher infla- market transitions away from more expensive stocks, and 3)
tionary pressures, conditions could not be more different the regulatory headwinds that plagued the market in 2021 are
across Asia. Not only is inflation lower across most countries in no longer the top priority for government officials.
Asia, but the People’s Bank of China is the only major central
bank that is easing rates right now. While China’s economy suf- Q: What opportunities do you see in the emerging markets
fered from a policy-driven slowdown last year, the government debt sector?
is now prioritising stabilising growth ahead of Xi Jinping’s lead-

ership conference later this year. In order to rekindle growth, A: The onset of the Federal Reserve’s tightening cycle and geopo-
Chinese authorities are now pursuing more stimulative fiscal litical tensions have pushed spreads on dollar-denominated
and monetary policies, which should be supportive of Chinese emerging markets bonds close to 400 basis points, the addi-
stocks as the economic growth outlook starts to improve. tional yield compensation an investor receives for owning a
riskier credit, and yields to well above 5.5%. Historically, these
From a valuation standpoint, Chinese equities are attractive, levels have been attractive entry points for investors. Since
trading at approximately 11 times forward earnings and near a 2010, there have only been a handful of occasions where
40% discount to US stocks. While some of this discount is justi- emerging market bonds have surpassed these levels. These
fied by Chinese equities’ lower relative earnings growth, the periods include the 2011 European debt crisis, Russia’s annexa-
contrast in policy settings should prove to be a tailwind in 2022,
and beyond, which should help narrow this gap. We are also tion of Crimea in 2014, China’s 2016 growth slowdown and
constructive on other Asian emerging market (EM) equities, during the 2020 Coronavirus pandemic. In the 12 months fol-
such as Taiwan, Korea and India, as we think they are poised to lowing each of these periods, dollar-denominated emerging
benefit from longer-term secular trends in technology, e-com- markets bonds delivered strong, positive total returns. Given
merce and digital payments. While EM Asia’s 2021 performance the modestly wider spreads and higher yields available in
was disappointing, we are more optimistic on the region as we emerging markets, we believe it is an opportune time to begin
selectively adding some risk.

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