Pimco expects Asian markets will be forced to make rapid adjustments in 2022, resulting in greater volatility.
Hammered by the delta and omicron Covid variants, the domestic services sector and consumption recovery in China will continue to face interruption in 2022, argues the US investment management firm in its latest market outlook for the region.
Although the China authorities have declared stabilising growth as the top priority for the year, Pimco believes the property sector and recurring Covid outbreaks remain the key headwinds, with the outlook for the Chinese housing market remaining “gloomy” into 2022.
Pimco noted that some easing measures have been taken, including high-level guidance for banks to support “reasonable” funding to developers, normalisation of mortgage loan extensions, and adjustments in transaction restrictions and mortgage rates at the city level.
On the other hand, the old housing market development model, featuring highly leveraged developers and rapid price increases, is now deemed unsustainable and in conflict with the government’s long-term agenda, while housing demand is expected to decline in the long term due to the aging population.
“It will likely take a while for funding to fully normalise and sentiment to recover, and we expect China’s property market to remain weak in 1Q 2022 before starting to improve as the year progresses,” said Pimco.
Relaxing policy
However, to restore market confidence, state-owned enterprises could step up in terms of land purchases, property development, and providing funding to troubled private developers via mergers and acquisitions.
Pimco believes relaxing purchase and sale restrictions in cities with strong demand, and granting migrants equal rights and benefits as city dwellers can also boost urban housing demand.
On-budget fiscal policy will likely turn more accommodative, including front-loaded fiscal issuance, accelerated government spending, and tax cuts. This should provide some support to infrastructure investment and relief to households and corporates.
“However, we believe the overall fiscal impulse will be modest, as weakening off-budget financing will undermine on-budget stimulus – land sale revenue and local government financing vehicle lending will likely remain constrained by the government’s efforts to deleverage property developers and local governments,” said Pimco.
With the backdrop of a more uncertain and volatile macroeconomic environment, Pimco continues to believe that active fund management is especially important during this fast-moving cycle where dislocations are likely and capturing resulting opportunities can be key to producing alpha.
