This house view report, prepared by Noah CIO Office, outlines our global macro insights from three major perspectives - the Russia-Ukraine conflict, the U.S. economy and Chinese economy. On Chinese economy, we recognize four structural issues that have hindered Chinese economy over the last 10 years and explain how our "Protection before Growth" asset allocation strategy will benefit our global HNW and UHNW clients. Specific approaches to asset allocation with detailed recommendations are also discussed in this report.
01. Global macro outlook
Despite worrisome developments from the escalating tensions between Russia and Ukraine, weneed to remain rational as professional institutions and investors. Coupled with heightened inflation in major global markets, the quantitative tightening policy from the US, as well as lingering impacts on world’s major economies caused by COVID-19, we believe that market volatility will persist to be a norm in the near term. This market environment is no place for a "fearful" fund manager orinvestor, which is why risk-off strategy has become the preferred option – leading us to our 2022 house view strategy: "Protection before Growth".
02. The U.S. economy
Since the mortgage crisis in 2008, the long-term quantitative easing (“QE”) policy and prevalence of ample liquidity across the globe have caused significant reflation – with asset inflation hitting every corner of the world. With the imminent QE policy reversal, the U.S. Federal Reserve (“FED”) and other countries are kicking off a series of rate hikes. In 2022, we expect the U.S. economy to thrive amid surging inflation. The shift from quantitative easing to quantitative tightening will be a challenging transition for asset prices, with quick withdrawal of liquidity possibly turning asset pricefrom inflation to deflation.
03. Chinese economy
2021 saw the aggressive rollout of stringent regulatory policies related to various sectors in China, causing fundamental changes in the valuation methodologies of these industries. However, the downward change in capital market sentiments went far beyond the actual economic data. Our take on the current Chinese economy is to conduct a more thorough fundamental analysis and avoid rushing to a conclusion.
Alongside the impressive economic growth in the past, China has been facing four structural issues: 1) shadow banking; 2) imbalanced real estate industry; 3) financing platforms; and 4) industries with overcapacities, as well as resource industry with high pollution and high energy consumption.However, China's macro strategy of "steady growth" and "structural reform" has been successful, with its industrial manufacturing sector optimizing and delivering remarkable results since the supply-side structural reform in 2015.
Overall, we think the Chinese government is committed to and remain persistent in its efforts to advance financial and economic developments in the real economy. The government plays a vital role in safeguarding small and medium-sized enterprises, as well as protecting people's livelihood – reducing living costs from housing to medical and education, with its focus shifted from efficiencyto equality. At the same time, the government embraces entrepreneurships in technology, and encourages social investments in early-stage tech funds, providing a solution to technological breakthroughs. From an investor’s perspective, we believe to incorporate early-stage tech focused investment funds in your asset allocation is a good decision to offset the impact of monetary easing and inflation in the long run.
04. Noah’s house view
Noah CIO Office’s house view for asset allocation in 2022 is the “Protection before Growth” strategy. To put it into action, we advise our global HNW clients to start with the following four actions:
1. Review portfolio asset allocation for you and your family to ensure asset preservation and segregatioon.
2. Rebalance your global asset allocation with an appropriate increase in U.S. exposure in your portfolio – we suggest a 60/40 China/U.S. asset allocation (assuming you have accessibility to assets globally without restrictions).
3. Diversify your asset allocation with multi-strategy absolute return funds1 within China’s public market. The ultimate goal is to preserve your assets and reduce volatility while having the upside to earn dividends. We also suggest investors to include equity/bond hybrid funds into portfolios due to the volatile public market this year.
4. Explore private equity (PE) funds – one of the main asset classes for HNW and UHNW clients, which is able to ride through market cycles and provide sustainable growth. We suggest a strategic allocation in PE funds with investment theme centered around science and technology. For fund selection strategies, we suggest investors to focus on early-stage sector focused funds, well-established funds and private equity secondary funds. These assets typically support long-term asset appreciation against the inevitable monetary easing measures and the coming inflations, despite it does not offer short-term liquidity.