Faced with the prospect of strong growth in European and American markets, Asian markets are suffering from a strong desynchronization. In this context, David Seban-Jeantet, Chief Investment Officer at Societe Generale Private Wealth Management, focuses on the diversification of investment portfolios.
What major economic trends are impacting the market today?
Two trends stand out for 2022: A fairly robust growth outlook in Europe and a desynchronization of the US and European markets with Asia. After a very good year in 2021, the developed countries should still post high growth rates of around 4% in Europe and the United States. On the other hand, Asia, which had held up very well in 2020, is facing a relatively disappointing year in 2021. China, in particular, is starting 2022 with a very low growth rate compared to recent years, mainly due to a real estate crisis, even though this sector represents 25% of its GDP. The second trend at the beginning of the year is the desynchronization of political and economic responses in Europe, the United States, and China. Thus, the emerging countries raised their rates a lot last year and should not see any major increases in 2022. A fairly marked fiscal tightening will impact the United States this year. This phenomenon is not, or only to a limited extent, found in the eurozone, particularly because during the Covid crisis, the use of part-time work within companies was favored, whereas in the United States, layoffs followed by tax transfers were favored. Given the robustness of the environment, the Fed gave in to the temptation of more severe monetary tightening. Moreover, credit to households and businesses is on the way to picking up, but the level of private-sector debt is quite low, so the risk is very low.
“Faced with the robustness of the environment, the Fed gave in to a temptation for more severe monetary tightening”
How is the market reacting to these changes?
For several years we have noticed the absence of payments on bond assets. In the U.S.A., this phenomenon has led some investors to venture into new markets, including the equity market and other asset classes such as private equity and infrastructure funds. Additionally, the fact that the Fed is expected to be tougher this year means that investors will face more volatility. They will therefore have to be more agile in terms of asset allocation and build in sufficient margins of safety. In this context, it seems important to ensure that investments are diversified. The challenge is to have an investment portfolio that is diversified by asset class, sector and region to avoid too high a concentration on a few stocks that are otherwise widely held.
What asset allocation recommendations will you offer your clients in 2022?
On currencies, we believe that the dollar will strengthen over the first part of the year. We are also seeing some yield opportunities in emerging market bonds and in Asia in particular, such as China. In the Chinese bond markets, we need to distinguish between government bonds, which yield around 3%, and the corporate credit segment, which has very high yields. There is certainly a real estate sector effect with companies on the verge of bankruptcy, but the entire market offers a significant risk premium and yields are close to 10%. The Chinese market situation could push the government to adopt a much more favorable fiscal and monetary policy in 2022. We have a fairly positive outlook on the equity market and expect a rebalancing of areas that have fallen behind. At the same time, we are maintaining margins of safety through safe-haven assets such as gold and alternative investment strategies.