Yuletide opportunities
The year-end festive season is a good time to make investments for the year ahead, writes Nuntawun Polkuamdee
Christmas is coming and as people celebrate the season of joy, warmth and hope, investors wish to profit from their investments during this festive time. For those seeking advice, Amonthep Chawla recommends a few investment themes for Christmas. The head of research at CIMB Thai Bank (CIMBT) suggests investing in China’s mutual funds, large global stock funds and alternative energy equity funds to capture growth opportunities amid increasing risks and negative factors in 2023.
INVESTMENT FACTORS
“Risks associated with investments in 2022 will continue into 2023 and could intensify. These include the Federal Reserve’s policy rate hikes, the war between Russia and Ukraine, and the Chinese government’s adherence to the zero-Covid policy, which affects the growth of China’s economy and the supply chain,” said Mr Amonthep.
He said Russia’s aggression in Ukraine could be prolonged and intensified, affecting the supply chain for feed, fertiliser and other commodities. There is also concern about the US central bank’s continued interest rate hikes to curb inflation.
“Although inflation in the US is likely to decline moderately, with the Fed cooling its rate hikes, the increases will continue in 2023 to push inflation down to its 2% target framework, which may cause the US economy to fall into a stronger recession than expected,” said Mr Amonthep.
China has maintained lockdowns in many areas under Beijing’s zero-Covid strategy. Although there have been protests in many cities, reflecting public outrage at this policy, the government has not shown any leniency.
If the policy is prolonged, it will affect demand in China, he said. A key concern is the real estate sector, which is plagued by high debt and a dip in land prices, which will aggravate the sector, said Mr Amonthep.
Supply chains and production might be disrupted, affecting exports and production in many countries that rely on raw materials from China, he said.
“These three risks are unlikely to disappear in early 2023, and there are other risks arising that investors should take into account,” said Mr Amonthep.
EMERGING RISKS
One new risk is the European debt crisis, especially for countries with high public debt such as Italy. The situation could turn serious if government bond yields rise to a point where investors are concerned about debt defaults, as in the past, he said.
“Although the European Central Bank has countermeasures, if the eurozone faces a recession amid rising inflation, government help may have limited impact and that is likely to affect confidence in the euro. That would prompt investors to reduce their holdings of risky assets and turn their focus to US dollar-denominated assets again,” said Mr Amonthep.
Emerging markets also face higher risk of debt default, particularly when their international reserves are falling rapidly from oil expenditures and outbound remittances.
“While income from exports and tourism declines, this problem may escalate and possibly cause a domino effect in other countries as well. If foreign investors lose confidence and pull out their investments, the currency will depreciate rapidly,” he said.
These countries may face liquidity problems until they seek help from international organisations. But this problem is unlikely to spread to countries with high international reserves, which helps maintain confidence, Mr Amonthep said.
One final risk is a new Covid strain that spreads quickly and avoids immunity. Even if the symptoms are mild, a new wave of the virus will result in a large number of patients and deaths, putting hospitals and health systems under pressure, he said.
As a result, the government may have to limit economic activities and growth, said Mr Amonthep.
Increasing infections could also affect confidence in the economic recovery, especially in the tourism and manufacturing sectors, leading to problems for the supply chain and exports, he said.
CHRISTMAS RALLY
The CIMBT investment themes for December include hope and are dubbed a Christmas Rally, said Mr Amonthep.
“Even though the global economy faces several uncertainties and volatility, the year-end season is full of festivities. The investment atmosphere offers an opportunity to temporarily return to liveliness,” he said.
“It’s like welcoming Santa during Christmas, especially after the market eased concerns about the Fed’s rate hike following its recent meeting on Dec 13-14.”
Late Wednesday, the Fed raised interest rates by 0.50% as the market expected, bringing the US policy rate to 4.50% at the end of the year.
The central bank also signalled its peak or terminal rate is likely to be in a range of 5.005.25%, meaning US interest rates could peak as soon as the first quarter of 2023 if the risks mentioned above are not severe.
Investors would then choose to return to risky assets again, said Mr Amonthep.
In addition, investors can find opportunities in the bond market for high-interest yields and a downward interest trend at the end of 2023, he said.
Mr Amonthep said investment opportunities for December are available in five segments:
China Equity Funds: The Chinese stock market has remained volatile on lockdown concerns. Purchasing power is declining as people have lost confidence. The Chinese economy is likely to grow less than expected, but the recent decline in China’s stock market is already reflected for many prices, he said.
Given the current value, Chinese stocks are very interesting, said Mr Amonthep. Investors may look for funds that invest in assets with a mixture of technology such as electric vehicles (EVs), online shopping and gaming, as well as those related to domestic consumption in the mainland, which is likely to benefit from the government’s additional stimulus policies.
Stimulus should happen once Beijing can control the epidemic at a satisfactory level, he said.
Asia-Pacific Equity Funds: Investors may be able to escape inflationary concerns in Europe and the US by turning to Asia-Pacific, which is reaping the benefits from cities’ reopening, more vibrant economic activities and opportunities to travel in the region, said Mr Amonthep.
If the Fed can actually slow the rate hikes, central banks in the region have an opportunity to follow suit, he said. Asian currencies that have started to appreciate against the US dollar should help support more capital inflows into the region.
Large Global Equity Funds: Global bourses are likely to rebound after the Fed slowed rate hikes, coupled with a bustling investment atmosphere towards the end of the year. These trends should support more investment in risky assets and increase opportunities for investment in large stocks with good cash flow, said Mr Amonthep.
He said investments should be diversified to markets around the world, particularly for growth opportunities in US stock markets in the fields of IT, financial institutions and healthcare groups, which have a chance to increase after the market moderated concern over the Fed’s interest rate hikes.
Alternative Energy Equity Funds: Oil prices have dropped on concerns over China’s lockdown policy and a global economic slowdown, which would lower oil demand. However, the direction and policies of many countries in promoting investment in alternative energy have continued, especially for batteries and charging stations for EVs, solar and wind energies.
This trend should drive the value of related companies in this sector, which has decreased considerably, suggesting it is time to gradually accumulate these stocks again, said Mr Amonthep.
Real Estate Investment Trusts: Investing in real estate is less active than the overall market, but is suitable for investors looking for stocks with low volatility and dividends or revenue growth from rental space in the service sector. The retail segment of the real estate sector, in particular, has been helped by cities’ reopening and the increase in foreign tourist arrivals, he said.
‘‘ While income from exports and tourism declines for emerging markets, this problem may escalate and possibly cause a domino effect in other countries as well. AMONTHEP CHAWLA Head of research, CIMB Thai Bank