In an ever-changing economic landscape, perspective is power

Monthly Investment Update

Markets at Crossroads, Rates are Peaking and Cracks are Here

In August, developed markets continue to make progress on inflation with both U.K. and Euro Area CPIs falling sequentially MoM. Moreover, the FED is likely to pause and reassess past monetary actions in September. Regardless, central bankers reiterated the willingness to raise rates further and bring annual inflation down to 2% target at the Jackson Hole Conference should current above-trend inflation proved persistent. Battle against inflation is not yet over.

Emerging markets are expected to see higher economic growth in 2023 relatively to developed markets. Regardless, exports of tangible goods and soft manufacturing activity are downside risks. USD strength and interest rate differentials between DM-EM are pressuring developing countries with economic imbalances and high leverage. The Chinese economy is recovering but faces a multitude of issues. The Chinese Government has swiftly responded with monetary and fiscal stimulus in increasing magnitude. To preserve domestic stability, China will be relentless in the pursuit of 5% annual GDP growth for 2023.

Investment Grade (IG) Bond: 10YR U.S. Treasury yield has risen by almost 100bps from 2023 trough in April. Synchronized monetary tightening by major central banks not limited to FED, BOE and ECB over the past year has created a situation where yields on sovereign/corporate fixed income are now higher than major central banks’ inflation target. Hence, focus here is on credit quality.

Global Equity: Tech-driven U.S. equity rally showed signs of cracking in August, Q2 earnings failed to push up S&P500 and NASDAQ 100 as valuations of some of the seven mega-cap tech names which were the main contributors of index performance YTD remain stretched.

China: Macro headlines remain negative for the month. Evergrande Group filling for debt restructuring demonstrated yet again the fragile state of China’s economic recovery. Regardless, Q2 earnings of Chinese tech names showed solid return to growth with large-cap BABA, Baidu and Meituan all reported robust YoY earnings growth across major business verticals.

Alternatives:   Crude price (Brent) held up well for the month despite negative YoY CPI read for China with FED minutes indicating concern on stubborn inflation. Saudi Arabia’s voluntary one million barrel per day (Mbpd) production cut is expected be rolled over into October. Gold prices were flat as fears of a global recession offset larger holding costs from higher rates coupled with a risk-off sentiment.

            We continue to recommend investing with a portfolio approach through a combination of asset allocation and weighting to best optimize risk-reward for investors. 

Wealth Research & Advisory TH. CIMB Thai.