After China policy makers clamped down on various sectors and tightened regulations in 2021, Blackrock Investment Institute believes that Beijing will now gradually loosen monetary and fiscal policies.
“We expect stricter regulation in China to persist, but think it’s unlikely to intensify in the politically significant year of 2022 given slowing growth,” said Yu Song, chief China economist, BlackRock Investment Institute.
Despite recognising the policy risks, the institute sees current valuations as offering investors adequate compensation for them.
The institute expects China will prioritise supporting growth, and an ambitious social agenda in 2022.
Blackrock maintains its long-term overweight to Chinese assets relative to low global allocations. It also thinks the market is too pessimistic on China fixed income, and favours Chinese government bonds for their higher yields and relative stability in an income-starved world.
Japan
Japanese equities have been boosted by a global cyclical rebound, so Blackrock Investment Institute has upgraded the country to overweight for 2022.
“We think Japan will benefit from the ongoing global activity restart. Domestically the Kishida government may deliver incremental stimulus; auto production should restart in the near-term; and covid cases remain low at least for now,” said Ben Powell, chief Apac investment strategist.
“This combination potentially may lead to earnings upgrades in coming months. These domestic and global drivers makes Japan’s relative valuation attractive.”
The institute is more neutral on broader Asian equities as some of the Asian emerging markets face more challenges in reopening after the pandemic and tighter policy regulations. It prefers more targeted exposure to China relative to the broader region.
Major themes
Blackrock also identifies three investment themes for 2022: “living with inflation, cutting through confusion, and navigating net zero”.
First, inflation jumped in 2021, and the institute expects price increases to persist for years to come. This means it prefers equities over fixed income and remains overweight inflation-linked bonds.
Second, uncertainty over how central banks restart economic activities would cause market confusion and volatility. Blackrock recommends trimming risk in investment portfolios amid an unusually wide range of outcomes.
Third, while emerging market countries excluding China account for around a third of global carbon emissions, they lack the money to pay for energy replacements. The only way to mobilise the required private capital is through greater public sector financing by developed market governments, which makes developed market equities more favourable than their peers in the emerging market, it said.
