Victoria Mio, Fidelity International
The fast bounce back in earnings growth was always going to slow down, has reached a tipping point and will likely have a soft landing in 2022, Martin Dropkin, head of Asian fixed income and Hong Kong investments at Fidelity, told a press conference last week.
Key risks that could drag the market into a more unpleasant scenario would be higher inflation and interest rates, disrupted supply chains, high debt levels and a prolonged regulatory storm in China. Despite these risks the cycle is not over and medium term, equities are more attractive than bonds, he said.
“Among emerging markets, all eyes have been on India this year. And with the support of government policy, higher corporate profits, India seems to be well placed to have a long profit cycle,” Victoria Mio, director of Asian equities at Fidelity, said.
She expects that Indian companies will see an average annual profit growth of over 20% for the next few years, supported by the digital transformation, clean energy transition, a strong credit cycle, and solid consumption growth.
Fidelity also likes Chinese equities, and expects more government policy support next year, although sectors such as healthcare, education and property are likely to face headwinds for several more quarters.
China’s purchasing manager’s index (PMI) is an important indicator that the policy makers monitor, according to Mio. Typically, whenever the PMI is below 50 for three consecutive months, then the Peoples Bank of Chia will step in and ease monetary conditions, she said.
“We already saw initial policy intervention in September, and we are also seeing some support for the property sector at present. Investors should watch out for even more [but moderate] easing,” Mio said.
Mio pointed out that China appears determined to move to an economic model “geared to the real economy, rolling back debt and addressing inequalities, rather than reacting to any downside in financial assets”. This should be helpful for markets in the long run, increasing moral hazard but enabling investors to price assets more accurately, she said.
Elsewhere in the world, investors are concerned about energy prices, inflation in general and, inevitably, Covid-19.
Covid-19 has turned into a more persistent drag on growth, according to Mio, who believes the virus is here to stay and that we must adjust to its persistence. “It causes labour shortages, particularly in developed markets, and rising labour costs can be sticky,” she said.
Nevertheless, with more countries committed to their net-zero target, several sectors including utilities, healthcare, and technology TMT sectors should see ambitious and focused companies emerge which will be attractive for investors, said Mio.