Global economic growth looks set to be solid in 2022, creating an environment in which equities should deliver attractive returns, John Woods, chief investment officer of Asia Pacific at Credit Suisse told its 2022 investment outlook webinar this week.
“There is an equity opportunity that we call ‘beautiful Europe’. It centres and focuses on European luxury stocks,” Woods said.
The Chinese middle class are one of the principal drivers of this strategy, he explained. As so-called “common prosperity” diminishes the focus on wealthy people and focuses instead on promoting and supporting consumption among the middle class.
“We will see further appetite for this particular strategy. And indeed, we are looking at a whole range of consumption factors in China and note that luxury good sales are one of the most important factors,” he added.
The bank estimates that for the five-years to 2025, luxury goods sales will grow by 33% in China, in US dollar terms, compared with 19% in the rest of the world.
Japanese earnings
Credit Suisse is also positive on the Japanese equity market, as the political risk premium has declined substantially with the appointment of a new government in October, which has introduced an “extraordinary fiscal package” to parliament, according to Woods.
In addition, the Japanese manufacturing sector is a “leveraged play on global recovery and global reflation,” he said, which should lead to higher corporate earnings.
Southeast Asia recovery
Meanwhile, Asia’s reopening baton has passed from the north to the south as Southeast Asia emerges from its Covid-induced malaise, according to Ray Farris, chief investment officer of South Asia at Credit Suisse. “Those economies, mainly in Southeast Asia, most negatively impacted by the pandemic in 2021 will be those which are likely to enjoy the sharpest recovery into 2022 as their vaccine rollouts grind on,” he said.
Thailand, Indonesia, Philippines, and Malaysia will all benefit from economic reopening or from a return of the tourist dollar. And the tourism sector is such a substantial multiplier across the region’s economies, he added.
“If we were to identify one particular market that we would go overweight in Southeast Asia, it would be Indonesia. And indeed, we’re already seeing a very sharp rebound in economic activity in Indonesia as the reopening becomes apparent with a rise in exports to China,” Farris said.
Cautious on China
In contrast, Credit Suisse is neutral on Chinese and Hong Kong equities as growth momentum in China remains weak. The tight monetary policy and rising defaults in the property sector are further slowing down domestic demand.
In addition, the ongoing regulatory crackdown on the new economy sectors is weighing on market sentiment. Given the weak operating environment, the bank expects analysts to further revise down their 2022 earnings estimates.
Although valuations have become more reasonable, catalysts to outperform global and emerging markets are absent for the time being. The policy environment will become moderately more supportive after the first quarter of 2022, including providing more clarity about regulatory intentions, and this might then provide reason to turn more positive, according to Credit Suisse.
However, Chinese equities’ struggles will likely persist amid regulatory uncertainty and property sector jitters, and Credit Suisse continues to recommend focusing on sectors and themes that are aligned with the government’s objectives: the ESG sector, including the renewable energy space.
