Hervé Lievore is a macro and market economist for AIA Group Investment which manages around $330 billion of assets globally, as of June 30 2021.
Speaking at AsianInvestor’s Insurance Investment Virtual Forum on March 16, Lievore said that the move by global finance chiefs to normalise policy along with the surprisingly high level of inflation will be the most influential factors on investors' portfolio performances.
“These factors are going to have a significant impact a lot on the traditional asset classes, such as government bonds especially in developed countries,” he said.
“Also the outlook for equities in the context where policy rates are going to be increased, which will result in stocks with a high duration or long duration being adversely affected.”
Less predictable economic influences are the rising geopolitical risks such as the crisis in the Ukraine, which could not have been anticipated three months ago.
Going into 2022, these events will continue to drive relative returns in a significant way, and markets will experience high levels of volatility until a clearer picture of their implications emerge, said Lievore.
“At the beginning, things will be extremely volatile, but as more information comes in, volatility tends to stabilise. And if a rebound has to occur, then it starts to materialise,” he said.
Another element that Lievore predicts will define relative performance in 2022 for different asset classes is the broad-based sector rotation — the movement of money invested in stocks from one industry to another as investors anticipate the next stage of the economic cycle.
“Over the past 10 to 12 years we had this massive outperformance coming from growth stocks and value tended to disappoint,” he said.
With the prospect of the normalisation of monetary policy in key markets — referring to the decisions of the US Federal Reserve and the European Central Bank — coming after such a long period of negative policy rates and ultra-loose monetary policy, Lievore believes that sector rotation is likely to continue for the next two to three years.
“I would assume that given the extreme valuation of growth stocks versus value, this trade is going to continue for some time, at least until we see the end of the hiking cycle in advanced economies — including North America, Europe, and to a lesser degree Asia ex-Japan,” said Lievore.
RIPPLE EFFECTS IN ASIA
During policy normalization, the Fed intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances — Lievore expanded on the potential ripple effects this will have on the Asian markets.
Given the fact that there has traditionally been a fairly high level of correlation between yield curves in Asia and the US yield curve there will be some strong pressure for Asian central banks to follow the trend, said Lievore.
“This upward movements in the US is going to provide some impetus in Asia. With the reopening of the economy, there will be a natural trend for domestic consumption to catch up with what we have seen in advanced economies and as such inflation is likely to go up and will create another layer of incentive for central banks to start hiking interest rates,” he said.
The interest rate hikes may not occur in the near term due to numerous uncertainties such as the extent to which the Omicron variant might destabilize plans to reopen the economy, but Lievore believes it will happen before the end of the year.
“The combination of these factors is going to contribute to pushing long-term yields higher and to stimulating earnings per share growth.” Lievore added, “Obviously, this would be contingent on what is going to happen in the Ukraine war.”
“Given our base case scenario, Asia is where the bulk of the positive effect of the recovery on equity performance will be most visible. As such we are still of the view that there is some room for further growth in Asia excluding Japan and China, to these restrictions in the investment universe.”