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May 2024

Broader fundamentals remain intact

We would not be surprised to see some near-term volatility, especially if long-dated yields continue to rise, but the broader equity bull market remains intact. Thus, we view any meaningful pullbacks as opportunities to add equity exposure.

Eli Lee
Managing Director,
Chief Investment Strategist,
Chief Investment Office,
Bank of Singapore Limited

After a strong start to the year, global equities hit a road bump in April. Risks related to geopolitics and “higher for longer” rates provided the catalysts for some profit taking. In contrast, Chinese equities performed relatively well in April, especially H-shares which experienced a broad-based rally led by the Internet, Real Estate and Consumer Discretionary sectors. We continue to hold a positive watch on the Chinese and Hong Kong equity markets as we look out for signs of a sustained recovery amidst a ramp up in policy measures by the authorities.

As for developed markets, despite recent investor jitters, we believe that the broad fundamentals of the equity rally remain intact given the peak of the global rate cycle and a soft-landing base case. The 1Q2024 earnings season could re-focus investor attention on resilient underlying fundamentals. We would view any meaningful pullbacks as buying opportunities for the longer-term investor.

Given that we now expect the Fed to start cutting rates in the third quarter with only two cuts in total for the year, we are adding more cyclical exposure in our sector preferences by upgrading our positions in Materials to Overweight and Consumer Discretionary to Neutral. At the same time, we are downgrading our position in Utilities to Neutral.

US – Looking through the volatility and staying the course

It was a volatile month for US equities in April, largely due to the hotter-than-expected inflation prints, the subsequent surge in US Treasury yields, as well as disappointing results from a number of tech bellwethers. The recent increase in geopolitical tensions in the Middle East has also contributed to further uneasiness amongst investors.

While we do not rule out a short-term pullback, we also see positive countervailing factors that can help support markets.

On the macro front, we now expect the US economy to avert recession and achieve a soft landing instead. As such, our macro team has increased our US GDP forecast this year from 1.5% to 2.1%. Past cycles have shown that an equity rally can accompany rate cuts that are induced by disinflation rather than faltering growth.

In this latest 1Q2024 reporting season, we also see indications that consumption is broadly holding up. Visa’s management, for instance, noted that they are seeing relatively stable US payments volume growth, with consumer spend across all segments being relatively stable as well.

We maintain our Neutral position on US equities at this juncture. We continue to recommend investors to look for opportunities outside of Magnificent Seven into the rest of Tech sector as the rally matures and broadens, and also other sectors such as Materials, Healthcare and Consumer Staples.

Europe – Mixed prospects ahead

After a healthy run year-to-date, European equities pulled back in April due to a confluence of factors such as geopolitics, and higher for longer global interest rates.

If companies deliver or exceed expectations during the 1Q2024 reporting season this could help shift the market narrative to the more positive end of the spectrum, but fundamental weakness could dampen hopes of any economic recovery and relative earnings resilience.

It is also noteworthy that the fiscal impulse is clearly turning negative, as Europe returns to its fiscal rules which were de-activated during the Covid-19 pandemic and energy crisis. As such, countries with budget deficits above 3% will need to consolidate their finances, and they include Italy, France, Belgium, and Finland. Although Germany is not in the list, there will also be fiscal consolidation due to its own national debt fiscal rules that have to be abided by. Hence, while a pick-up in global growth would benefit Europe, there are opposing factors that would be a drag on European growth as well. We maintain our Neutral position on European equities.

Japan – Awaiting full-year results which could bring better disclosures and guidance

April was a highly volatile month for equity markets and Japanese equities were similarly not spared. What also caught us off guard was the sharp depreciation of the Yen against the US Dollar, despite the recent move by Bank of Japan (BoJ) to hike its benchmark rate for the first time in almost two decades. As such, our highlighted preference for domestic-oriented Japanese companies will need to take a longer time to play out given the negative earnings impact from a weak Yen.

We look forward to the upcoming earnings season where we could see an improvement in corporate governance disclosures and communication on dividend and share buyback policies ahead. There was also encouraging data from the Japan Securities Dealers Association (JSDA), which showed a significant increase in new Nippon Individual Savings Account (NISA) openings and value traded in 1Q2024.

Asia ex-Japan – Macroeconomic landscape taking centre stage

The macroeconomic environment has taken centre stage in shaping the performance of the equity markets in the near term, given the volatile moves in the 10Y US Treasury yields and currencies. Bank Indonesia surprised with a rate hike of 25bps to 6.25% on 24 April in a bid to support the Rupiah. We believe the equity markets of Taiwan, Hong Kong and South Korea have higher negative sensitivity to US real rates, while this sensitivity is lower for India. The country is holding its elections from 19 April to 1 June 2024 in seven phases. The robust manufacturing and services PMI provide a positive signal to India’s economic growth outlook, while 2024 consensus earnings per share (EPS) growth of 16% for MSCI India appears respectable. For the overall MSCI Asia ex-Japan Index, consensus is forecasting growth of 21% for 2024 and 16% for 2025. In terms of 2024 earnings revisions since the start of the year, this has increased the most for the MSCI indices of Philippines, Taiwan, and India. On the other hand, Hong Kong, China, and Thailand experienced the largest downward revisions in their Earnings Per Share.

China/HK – Supporting measures to revive capital markets

Policymakers announced a series of measures for the long-term development of capital markets. The State Council’s “9-point” guideline has a focus on “supervision and high quality”, aiming to revive China’s capital markets. In addition, the CSRC announced “5-measures”, including further expansion of the Connect scheme to support Hong Kong’s capital market. The Hang Seng Index and MSCI China Index have outperformed the broader Asia ex-Japan market in April.

Looking ahead, we believe 1Q2024 earnings would shed more light on whether earnings downgrades are bottoming or not. Consensus earnings estimates for MSCI China have been revised down from January and are getting closer to our expectations.

With continued uncertainty in the rates and growth outlook, we advocate focusing on the key investment themes of

  1. proliferation of generative artificial intelligence (AI), including internet and IT,
  2. quality growth and market leaders amid a bumpy recovery, and
  3. quality plays with decent yield to weather volatility.

Global Sectors - Reflation rotation with rising risk-off sentiment in some sectors

Reflation trades have been in vogue due to looser financial conditions, as seen from the outperformance of the Energy and Materials sectors since March. However, while Energy still led in April, there was a rise in risk-off sentiment which led to the outperformance of the defensive sectors, such as Utilities and Consumer Staples.

As we now expect the Fed to start cutting rates later in 3Q2024, with only two cuts this year, we downgrade our position in the Utilities sector (which generally trades like a bond proxy) from Overweight to Neutral, while keeping our Overweight positions in the relatively defensive sectors of Healthcare and Consumer Staples.

We also upgrade our position in Consumer Discretionary to Neutral as we view the sell-off as overdone and turn less negative on the sector as economic prospects look less dim than earlier expectations. Similarly, we upgrade our position in Materials to Overweight, with the sub-sector of metals and mining looking especially more attractive given the disconnect in valuations of gold miners compared to where gold prices are currently trading, while the outlook for copper continues to look bright given its important role in the energy transition along with supply challenges in the meantime.

As for Tech, there was significant volatility over the past month. Apart from macro and geopolitical concerns, disappointing guidance and/or earnings scorecards from bellwethers like ASML, TSMC and Meta Platforms have caused investors to re-evaluate relatively heavy positioning in some of these names. However, we think it is important to see some of these results in context. For instance, TSMC’s results, and management commentary continue to point towards strong demand for AI-related products, which is an important insight for numerous semiconductor names leveraged to this theme.

Key semiconductor names across Europe and the US also indicate that important end markets like autos and personal electronics that have been under pressure for some time, are likely approaching the trough. We continue to remain constructive on Tech and maintain our preference for names that retain exposure to secular themes while still exhibiting a Growth-At- Reasonable-Price (GARP) tilt.

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