Rush-hour traffic in Kuala Lumpur is back; restaurants are fully booked for dinner. Across the Klang Valley, folks are braving the Covid-19 virus, donning masks and washing hands while they go about their business with renewed vigour and some sense of hope. Interstate travel is now good for those who have been fully vaccinated.
The one other sign of life returning to a new normal is the reopening of schools. I am sure there will be a collective roar of joy from both parents and children when it happens (I’m waiting with bated breath for this one myself!). While spending quality time together has been good during the lockdown, it will indeed be nice for the children to see their friends and enjoy learning together as school is meant to be. Of course, safety remains a top priority.
As we strive to get back on our feet, I am also conscious of the need to stay with the good habits formed during lockdown, such as eating healthier, loading up on home-cooked food, allocating time for simple, yet fun, activities like a game of Scrabble and even keeping track of my investments more attentively.
This year has so far been one of contrasts for investors. Developed markets have performed well with a return of 10% to 15% year to date. Emerging markets have performed poorly with a return of -2% to -3% in the same period. Readers of this column would know some of the reasons for the divergent trends, with access to vaccine and corresponding vaccination rates being among the significant factors. Another is the reform policies of the Chinese government that have dented investors’ sentiment. The real point I am trying to make here, though, is that investors would have done well with a diversified portfolio, with exposure in both developed and emerging markets. While it seems clichéd to say “diversify your portfolio”, the truth still holds.
As Asians, we tend to favour the region that we know and understand better. And after years of having to read newspapers articles and social media posts with Donald Trump’s comments and tweets, it is not unreasonable to have a slanted view of the developed markets, led by the US. As I write, the US-China tension has flared up once again, with nuclear submarine deals to Australia and jets flying close to the island of Taiwan causing tensions between the two countries. As investors, this geopolitical tension does not bode well for our investments, and we are reminded of the US-China trade war and the volatile market performance during the trade tensions of 2018.
However, it is important to maintain a wider perspective of things; that is, to appreciate that a balance of power in Asia is a good thing where geopolitics is concerned. After all, China is an important trade partner to us, and the security provided by the US in the South China Sea is important to all trading nations in the region that requires freedom of navigation.
Therefore, it is important to have balance in one’s investment portfolio; exposure in both developed markets and emerging markets is also a good thing, with China leading Asia’s growth of 5.2% and the US leading developed market growth of 4.6% in 2022. As we are in the last quarter of 2021, it will be another good habit to review your portfolio and take stock. If you have taken the free lunch of diversification, you would be looking at positive returns to your portfolio so far this year; if not, then there is no better time to review and rebalance your portfolio exposure.
As we look forward to 2022, the outlook remains constructive, with the underlying low interest rate environment supporting the reason to stay invested and stay engaged. But investors must deal with the US Federal Reserve’s reduction of its balance sheet and subsequent interest rate hikes — unlike last year, when the dominant view was for interest rates to remain ultra-low and markets rose in a relatively linear manner. Next year will be quite different, with the Fed reducing quantitative easing (stop printing money) and eventually coming to a point at which interest rates will move higher from the current level of 0.25%. Market volatility will increase, as there are different views of the time when US interest rates will move higher; the uncertainty will drive markets up and down more often than in the last two years. But with little return from putting money in cash deposits, investors need to keep a sane mind and invest for the long term.
In Asia, China’s reforms are set to continue, with the current reform agenda taking uncertainties well into 2022. There is a silver lining, however, in that these reforms are necessary for sustaining the growth in the region for the longer term. Reducing high debt loads in Chinese property developers will mean lowering the risk of a property bubble in the future that is a common cause in the history of economic boom-and-bust cycles. Although some would say China is already staring at a possible economic bust, that is not the scenario in my mind. The ripple effect looks to be contained so far to a few names and does not look to be a real threat to China’s growth outlook in 2022.
Just as football fans look forward to a football match played between two great rivals with gusto, investors ought to appreciate the need to balance their portfolio between two geopolitical rivals (developed and emerging markets). We only wish that it were as simple or fun as a football match.
Michael Lai is vice-president of wealth management research at OCBC Bank (Malaysia) Bhd