In an ever-changing investment landscape, perspective is power

Monthly Investment Update

Global Growth Remains Resilient but will FED’s Patience Crush the Soft-Landing Narrative?

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 20 bps for 2024. For emerging and developing economies, growth is expected to remain stable at 4.2% for both 2024 and 2025, with 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. 

In the latest FED’s projections, the dot-plot implies only one rate cut for 2024 down form three in March. GDP and unemployment projections were kept unchanged by the FED but both core PCE and PCE for 2024 were revised upwards by 20bps. FED foresees inflation falling to the desired 2% target only in 2026. However, multiple data points may have already indicated that the U.S. economy is slowing. U.S. retail sales rose 0.1% MoM in May versus 0.3% expected and leading indicators decreased 0.5% to a reading of 101.2, following a 0.6% decrease in April. The Conference Board projects U.S. real GDP growth will slow further to under 1% (annualized) over Q2 and Q3. Moreover, unemployment has ticked up to 4% and Q1 GPD grew 1.6% annualized pace, far below the 2.4% estimate. 

“Our plan is not to wait for things to break and then try to fix them”, FED Chair Powell stated during the press conference post FOMC meeting. The window for implementing first rate cut without “breaking” the U.S. economy is rapidly narrowing. First rate cut in December may prove too further afield while a November cut (during an election month) risks ire form the GOP as President Biden is caught in a tight race with former President Trump. Markets are counting on two rate cuts of 25bps each in 2024 starting in September and followed another in December as reflected by in move in 10 YR U.S. Treasuries. Deteriorating economic data, if sustained, may force the FED’s hands as downside risk to U.S. GDP growth is starting to outweigh upside surprises in inflation.  

In May 2024, inflation in the Euro Area rose to 2.6% YoY up from 2.4% in April after multiple months of progress.  The ECB implemented a 25bps cut in policy interest rates June but may refrain from cutting in July countering earlier expectations of back-to-back cuts due to the uptick. BOE edges nearer to a rate cut as headline CPI fell to 2% YoY in May for the first time since July 2021. However, with core CPI running at 3.5% YoY and services CPI at 5.7% YoY the BOE may refrain from providing near-term guidance on rate cuts. Japan’s Q1 GDP shrank an annualized 2% QoQ worse than 1.5% analysts’ estimates. China’s GDP expanded by 5.3%YoY during Q1 2024 and 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 world’s 4^th largest economy. The Indian central bank raised real GDP growth to 7.2% up from 7% earlier for 2024. 

Global Equity: 

The U.S. equity market remains bifurcated. Initial broadening out beyond top tech/AI names earlier in the year reversed somewhat as NVIDIA was responsible for most of the recent S&P500 gains. Since May 17, Nvidia has accounted for 81.1% of the gains in the Bloomberg 500 (cap-weighted index) and that 156 stocks have moved up while 345 have moved lower. The S&P 500 Equal Weight Index has fallen four weeks in a row, which amounts to a decline of about 3%. The indexes that either have Nvidia as equal weight or are absent altogether have struggled since peaking in March, while market cap-weighted indexes with Nvidia have made new highs. 

The S&P500’s blended 12-month earnings growth is expected to be 12.3%. However, 12-month earnings growth is expected at only 4.25% for the equal weighted index a mere one-third of the market cap weighted index. Market has pegged next 12m earnings growth largely on the tech sector.  This creates risks should tech fail to deliver on expectations but also highlight investment opportunities that exist among non-tech names and laggards. Bloomberg estimates show S&P500 EPS growth of 8.79% for 2024 lower than 11% EPS growth projection at end-2023. EPS growth is expected to pick up however to 15.31% in 2025. Both S&P500 and NASDAQ remains expensive versus history. 

NIKKEI225 saw boost from export-related shares are gaining traction thanks to a weaker yen. Financial stocks like Mitsubishi UFJ Financial Group and Daiwa Securities have seen significant outperformance, with banks leading sector gains. A win by the incumbent BJP party instilled investors’ confidence in the Indian equity market. However, with PM Modi is unable to win a majority in the just-concluded general election hence policy execution risk is on the rise. 

China Equity

Continued fiscal and monetary support are required after the optimistic start to year was met by earnings downgrades as investors questioned sustainability of China’s economic recovery. PBOC stood pat the latest interest rate decision. Market now expects CSI300 earnings growth of 3.11% in 2024 but a significant improvement is expected in 2025 with EPS growth projections of 12.73%. HSI EPS projections for 2024 and 2025 are pegged at 3.57% and 6.47%. Valuation multiples for both the CSI 300 and Hang Seng Index continue to remain below 10YR average. 

There is scope for upward EPS revisions should China’s real estate measures prove effective in stemming the decline in property prices. Housing prices in China have dropped by 25% to 30% on average from their historical highs in 2020 and 2021. It is estimated that there are 20 million pre-sold apartments that have yet to be completed, for a funding gap of around 3 trillion yuan (USD414.58 billion). Measures recently implemented include lower down payment minimums to as low as 15%, versus 20% previously, cancelling the floor on mortgage rates nationwide and asking local governments across the country to buy unsold homes from developers. Support measures were rolled out in one go and on the same day showcasing the CCP’s focus in solving the housing crisis. There is still scope for larger policy support during H2 as inflation is benign. 

Alternative Assets

REITs performance continues to disappoint YTD but this may soon change as FED guide markets toward the first-rate cut potentially as soon as September. REITs and infra assets will benefit from greater allocation as Treasury yields are expected to remain under pressure from softer U.S. economic data. Investors will need to seek out other income producing assets including but not limited to REITs and infra assets to meet desired returns as part of various income strategies. Gradual accumulation of REITs and infra asset for income seeking investors may prove prudent at this juncture as total returns are set to improve over next 12m.

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 USD85/BBL as an aerial drone likely launched by Yemen's Houthi rebels struck and damaged a vessel in the Red Sea. 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. However, more supply is incoming as OPEC+ is set to gradually unwind 2.2 million barrels a day cut starting October but also extended a cut of 1.65 million barrels per day, announced in April 2023, until the end of 2025.

Equity remains a compelling asset class with multiple investment opportunities across the globe. However, going into H2 2024 the focus should be on quality names with reasonable valuations, Asia and laggards. Momentum may finally start to give way to fundamentals.  It is now feasible to gradually add duration to fixed income portfolios in anticipations of lower policy rates. 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)