In an ever-changing economic landscape, perspective is power

Monthly Investment Update

Global Growth Remains Resilient 

In its latest projections, the International Monetary Fund (IMF) revised up global economic growth forecast to 3.2% for 2024 and 2025. Economic growth projection for 2024 was revised up by 30bps relative to October’s forecast. Regardless, projections for global growth in 2024 and 2025 remain below the historical (2000–2019) annual average of 3.8%, underscoring impacts from restrictive monetary policies, withdrawal of fiscal support, as well as low underlying productivity growth. For developed economies, growth is projected to rise from 1.6% in 2023 to 1.7% in 2024 and 1.8% in 2025, marking an upward revision of 20bps for 2024. For emerging and developing economies, growth is expected to remain stable at 4.2% in both 2024 and 2025, with a moderation expected in emerging and developing Asia. Geopolitics and ability of global central banks to manage a “soft-landing” will be key determinants to this year’s global GDP growth.

The U.S. economy remains surprisingly strong with retail sales rising 0.7%MoM in March, a slower pace than February’s upwardly revised 0.9%MoM gain. Moreover, the IMF has also upgraded U.S. economic growth to 2.7% this year up 60bps from prior forecast. Sticky inflation and a strong run of U.S. economic data have cast doubts on the FED’s eagerness in lowering policy rate. The Euro Area continues to make significant headway against inflation. In March 2024, inflation in the Euro Area fell from 2.6%YoY to 2.4%YoY, as reported by Eurostat, marking a four-month low and confirming preliminary data. ECB is projected to starting cutting interest rates starting June but would also ramp up QT during 2H 2024. Similarly, UK CPI rose by 3.2%YoY in March 2024, the slowest pace since September 2021. Japan’s Q4 2023 GDP was revised up to 0.4% expansion from -0.4% as reported earlier.  China’s GDP expanded by 5.3%YoY during Q1 2024. Industrial production jumped 6.1%YoY during Q1 2024, boosted by strong growth in high-tech manufacturing. IMF expects the Indian economy to surpass that of Japan’s in 2025 and become the 4^th largest economy while the Indian central bank projects a solid 7% real GDP growth for 2024.

Global Equity

Market is broadening out with the Mag-7 having accounted for 40% of S&P500 returns YTD, relative to 60% last year. Earnings season has kicked off and although only 14% of S&P500 constituents have reported earnings as of this writing, the picture is very much mixed. All eyes are on forward guidance and big tech-AI names’ earnings. The S&P500 saw downward 2024 EPS revision from 11% at-end 2023 to 9.2% today. S&P500 TTM (Trailing-twelve-months) P/E stands at 24x above 10YR average of 20.9x. Large U.S. banks with outsized contribution from wholesale banking and wealth management such as Goldman Sachs and Morgan Stanley reported robust earnings due to the recent market rally. However, NIM pressures were evident among consumer banking names such as Citigroup, J.P. Morgan and Wells Fargo as cost pressure builds from elevated interest rates.

The current actual + estimated EPS growth rate for the S&P500 for Q1 2024 has now dropped to 0.5%YoY down from 3.4%YoY at end-Q1 2024. If this holds true, the gap between as-reported earnings and earnings projection for full year 2024, will widen further and potentially trigger a market correction. Despite the small number of companies having reported so far 74% have reported actual EPS above estimates, which is below the 5-year average of 77% but met the ten 10-year average. Moreover, analysts have penciled in significantly higher YoY EPS forecast in the coming quarters due to a resilient U.S. economy.

NIKKEI225 saw pressure from chip names such as Tokyo Electron, Renesas, Advantest which sold off in line with U.S. peers. Indian equities volumes declined as national election is now underway. The election comprises of nearly one billion voters and 44 voting days. The incumbent BJP Party is the favorite to win.

China Equity

Much of the good news in manufacturing comes from China’s “new three” industries: EVs, solar panels and batteries. Policy rates were held steady and retail sales rose 4.7%YoY during Q1 2024. Low market expectations coupled with compelling valuations may result in upside surprises throughout 2024 as economic recovery picks up steam. HSI Index currently trades at 8.54x P/E below 10YR average with EPS growth forecast of 6.51%YoY and 7.92%YoY for 2024 and 2025, respectively. The mainland CSI300 Index saw meaningful upward EPS revisions to a robust 15.64%YoY and 13.66%YoY for 2024 and 2025, respectively. However, the property sector remains a drag. Property investments slumped 9.5%YoY in Q1 2024, according to the official NBS data. New property sales slid 27.6%YoY during the same period despite local governments having scrapped some restrictions on land sales.

Alternative Assets

REITs performance soften somewhat in during the first three months of 2024 after a strong Q4 2023 as investors reassessed policy rate path on the back of sticky U.S. CPI data. There is approximately USD6 trillion sitting in money market funds globally earning 5% from short-term U.S. Treasuries. REITs will see greater allocation as market converges around a rate cut consensus. Investors will need to seek out other income producing assets such as REITs and infrastructure assets for yield enhancement.

Market is increasingly cognizant of the risks posed by the Isarel-Hamas conflict which have expanded to include Iran, Pakistan, Lebanon, Syria and Iraq. Disruption to cargo and energy transportation in the Strait of Hormuz, Red Sea and Suez Canal could put global economy in dire straits. Crude priced jumped to over USD90/BBL as Iran retaliated Israel’s attack on its embassy in Syria with Israel responding shortly after. Moreover, Ukrainian attacks have destroyed 16% of Russia’s refined crude capacity. Crude prices have resulted in higher headline CPI and may drive core CPI higher over the next few months.

We continue to see a compelling case that calls for relatively higher allocation into fixed income relative to equity over a six-twelve months timeframe as risk premium remains under pressure. We recommend clients to invest with a portfolio-based approach through a combination of strategic and tactical asset allocation (SAA and TAA) to best optimize risk-reward under all scenarios.

Arun Pawa, IP, FM, IA, Investment Strategist 

CIMB Thai Bank (CIMBT)