Market Outlook - June 2024

Equity markets have continued to reach new highs, driven largely by the outperformance of semiconductor stocks. We believe that such concentrated market movements warrants some caution as it implies that investors do not have confidence in the broad economy.

The US Federal Reserve has also largely withheld any conviction on interest rate cuts in the near-term, citing robust employment and sticky inflation. Market analysts thus far have also displaced any possibility of a recession as businesses and consumers appear to stay resilient. On the other hand, there are signs showing that US unemployment is gradually rising with the unemployment rate reaching 4%, from a low of 3.4% in 2023. As the economy continues to weaken gradually, we are aligned with expectations that one interest rate cut is likely on the table this year.

China’s market performance has started to lag after the government’s policy announcements to stabilize their property market. Some profit taking is expected, given the sharp upward momentum, in our view. Market participants are likely waiting for further updates to be announced on the property industry before having conviction that the slowdown is under control. We uphold the view that the property industry will not result in a systemic risk, given the government’s focus on the issue.

In the technology sector, we are optimistic on the long-term productivity gains from AI applications. One study found that software developers using Microsoft’s GitHub CoPilot, their AI assistant, completed coding tasks up to 56% faster than those not using the tool. Expectations on AI applications are highly optimistic, with investment in hyperscalers expected to grow at least 20% per year up to 2030. While automating tasks such as summarising emails, customer service and image generation would see cost savings, we believe that AI will have to evolve to artificial general intelligence for it to see major contributions to the economy. Generative AI has made significant improvements in recent times, but it lacks the ability to adapt when queries falls outside of its training data. Advancements in general intelligence should mitigate this limitation, paving the way to a more versatile AI solution. Moreover, end-consumer use still seems lacking as current mobile hardware is too slow to process AI tasks efficiently. However, with massive AI investment persisting, there are already significant improvements occurring and we shall continue to look for opportunities as companies innovate and monetise AI features.

Market Outlook - May 2024

As of now, global equity market prices have already recovered from April’s decline on the back of cooling US economic data and significant share buyback programs being announced. We expect this erratic market behaviour to continue until the timing of interest rate cuts becomes certain as investors eagerly price in any possibility of monetary easing. Additionally, with US elections closing in, there will likely be additional volatility in the coming months due to uncertainty on government policy adoption.

China has taken more direct actions to restore confidence in their property sector. These included complete removal on home-buying restrictions in Xi’an, Hangzhou and Chengdu and further relaxation of property buying measures in other major cities. More significantly, the administration has setup an initial 300 billion RMB facility for local governments to acquire excess property inventory and develop them into affordable housing. This would further alleviate liquidity stress on property developers. These actions were greatly supported by market participants as shown by major inflows and sharp price appreciations in their equity markets. The facility is encouraging and will likely need to be expanded for it to have a meaningful impact on the broad property sector. If expanded significantly, we believe that property prices should form a bottom and subsequently, consumer confidence should return. On top of that, the Chinese government has targeted large scale equipment renewals and trade-ins of durable consumer goods to boost private consumption growth, and this could spread over several years. Other monetary policy easing including removing the floor on mortgage rates and lowering of downpayment rates have been announced.

With Q1 earnings season coming to a close, we observe a mixed outcome for large US firms. Many consumer discretionary firms continue to report further slowdowns in spending and an increasingly selective consumer. Consumer companies with international exposure tended to comment on a slower-than-expected recovery from Chinese consumers. On the other hand, major US technology firms maintained growth, with some showcasing rising growth owing to AI adoption. China paints a similar story where technology firms showcase growth, while consumer spending was lukewarm in most segments. The difference is that China’s consumer spending has been on an upward trajectory while US is the converse.

With major economies at potential turning points, we are aiming to be selective within US and China given our current exposures. Despite the weak economic data in Japan, we remain positive on the corporate governance restructuring process as it would benefit shareholder returns over the long-term.

Market Outlook - April 2024

Recently, both bond and stock markets saw increased volatility. This shift came as inflation and retail sales in the US outpaced expectations repeatedly. Meanwhile, the Fed again announced their decision to wait for more data before lowering interest rates. As a result, investors aggressively readjusted their interest rate forecasts, which directly impacted equity markets. We believe the concerns are warranted as commodity prices have soared as of late, which could cause higher inflation in the coming months. At this point in time, our assessment suggests that the equity price movements may be a short-term reaction to bond yields and we will monitor these trends attentively.

China’s program to support “whitelist” property projects has raised RMB 469 billion as at end-March. This is a notable increase over the RMB 200 billion previously reported and we hope to see substantially more funds disbursed given the size of China’s residential property sector. There are also expectations that the People’s Bank of China will be enriching its monetary toolbox by gradually increasing the trading of government bonds in its open market operations.  To us, this is a form of monetary policy easing, another positive step instituted. We also hold a positive outlook on China's recent Q1 GDP growth and the expansion in PMI numbers. However, we acknowledge an initial slowdown in growth for key economic indicators, such as retail sales and industrial production, indicating persistent sluggishness in the domestic economy. We will continue tracking these developments in the coming months to confirm the trend.

Additionally, we are monitoring the escalating geopolitical tensions between Iran and Israel, particularly as Israel contemplates its response to Iran's recent drone strikes on Israeli territory. This situation has the potential to significantly impact crude oil prices, adding risk to higher inflation in the near-term.  The US-China tension continues to be a long-term issue. It was reported that the US lawmakers have introduced a bill to bar US mutual funds from investing in indices that track Chinese stocks. We note that global portfolio allocation to the Chinese market has already been reduced since last year. We believe this has already resulted in the US market valuation premium to the Chinese market at an extremely high level versus historical trends. We believe that once the Chinese economy is on a firmer and sustainable growth footing, the valuation premium should contract.

Over the near-term, inflationary risks in the US and uncertainty in China may cause headwinds to equity markets. As stated above, our analysis on prevailing data suggests that this is a temporary correction given heightened valuations in developed equity markets. As such, we will look for attractive opportunities going forward.

Market Outlook - March 2024

Throughout the month, the Fed reiterated that there is no urgency for interest rate cuts during the first half of 2024. Furthermore, they specifically addressed risks within the commercial real estate sector, acknowledging that while the situation is currently manageable, it will lead to more banking failures. This aligns with our cautious perspective regarding the potential consequences of policy mistakes if interest rates are kept elevated for an extended period.

China has initiated action to support “whitelist” projects announced previously, with major commercial banks approving over RMB 200 billion in loans to help finance the completion of these projects. We view this as a positive first step, but additional financing will likely be needed to ensure sufficient liquidity to complete these projects. As such, we will monitor for further announcements on this topic, as well as its impact on property sales and prices.

The recent Two Sessions convened by the Chinese Communist Party saw similar 2024 economic targets set as last year. The 5.0% growth domestic product (“GDP”) growth target set for 2024 seems ambitious given the modest deficit target of 3.0% and a consumer base that is focused on saving. However, we believe the GDP target may be attainable, as we are observing gradual shifts in consumers’ behaviour where they are increasingly more inclined towards spending, and we also note that growth outside of the real estate sector remains robust.

Following a review of the latest earnings reports from leading corporations worldwide, we've noted predominantly robust earnings growth for 4Q23, with some companies projecting modest top-line expansion for 2024. However, US stocks that missed results and guidance expectations fell sharply given their mostly elevated valuations. With the outlook becoming increasingly uncertain, we will monitor closely for any signs from both economic and industry data to decide the next portfolio move. Regardless, we remain positive on the long-term outlook of our holdings.

Market Outlook - February 2024

As we enter 2024, expectations of an early interest rate cuts by the Fed and the European Central Bank continue to fade as both central banks downplayed the odds of a cut soon. For the US, this is due to the robust economic data that was released so far. Continued expansion in the US economy suggests that the FED needs to move carefully to not lower rate too soon or risk inflation creeping back up. FED has to also consider the weakening growth in some parts of the economy which may lead to broad-based slowdown. This is a tricky and delicate balancing act for the US FED and could entail policy mistakes in the near term for the US economy and as a corollary, the financial markets if not done correctly. This is in-line with our initial thinking. For the Eurozone, inflation remains sticky on the back of still-high energy price, amongst others.

In China, after the monetary policy easing announcement, the Chinese government followed that up by lowering the 5-year loan prime rate by 25 basis points to 3.95%. Under the property project “whitelist” initiative, commercial banks are encouraged to provide lending to the “whitelists” made by the local governments. These rapid moves recently are a signal that the government is determined to front-load stimulus measures to prevent the weak sentiment in the housing market from spiraling downwards. We believe that these support policies would be progressive to ensure that real estate market recovers on a sustainable trajectory.

We are also seeing initial positive datapoints domestically from the Monetary Aggregate numbers and improvements in domestic travel and spending during the Lunar New Year period. On the external front, China is experiencing export growth for the second consecutive month in December 2023. We expect continued improvement in the overall economy for 2024.

All these moves came thick and fast as the State Council called for “forceful measures” to restore confidence in both the economy and financial market.

For Japan, we are encouraged by the strength of the economy and the market since last year. The corporate reforms in Japan which have been is talked about for years, is finally coming into fruition. The days of the deflationary period appears to be coming to an end. The tepid economic growth has broken out of its 30-year deflationary phase. We believe these reforms should lift corporates’ profit margins and shareholder returns and thus create ample room for further unlocking of value for shareholders.

In summary, we are optimistic on the Asian markets’ prospects, and cautious on the US market given the headwinds we would be facing, and the overcrowded investments in the US Technology sector to date.

Market Outlook - January 2024

After 3 years of rising global bond yields and with developed countries’ central banks largely done with interest rate hikes, the main theme for 2024 appears to be the expectation for easing of interest rates by the US Federal Reserve. We are of the view that the US and Europe will likely witness sharply slower economic activity and higher unemployment rates. Europe in particular, faces a much higher risk of a prolonged recession. On interest rate, we believe the US Federal Reserve will hold off interest rate reduction as long as possible. This is because shelter cost, a main component of inflation, continues to remain stubbornly high. Furthermore, shipping costs for goods should increase as there would be trade disruptions from rising geopolitical risks as the US and the UK carried out air strikes against the Houthi rebels in Yemen following Houthi attacks on commercial shipping the Red Sea.

Geopolitical tensions will be a key factor in our assessment of the global economy and financial market performances. In our opinion, the US-China tension is the long term, dominant factor in looking into the future state of the global economy and financial markets. Our initial take is that there is some form of business decoupling between both countries, especially in the Semiconductor industry. We see this as an investment opportunity as we believe there should be more innovation proliferating from this tension.

Last year, we saw the emergence of ChatGPT, a generative artificial intelligence (“AI”) which enables users to refine and steer a conversation towards a desired length, format, style, level of detail and language. This stirred a lot of interest in companies adopting AI in one form or another. Market participants are currently at the stage of estimating and gauging the eventual global addressable market. We have some AI companies in the portfolio currently and are excited about their long term growth potential of its applications. We also believe in the enormous opportunities of AI and are constantly on the lookout for these investment ideas. We shall highlight these ideas when we have added them to the portfolio in future.

The Chinese economy is recovering with the main drag coming from the real estate sector. However, it is showing signs of stabilizing after a series of monetary and fiscal policy support. To recap, the Central Economic Work Conference called for policy coherence and reiterated proactive fiscal expansion. Secondly, the next stage of the real estate policy is focusing on meeting developers’ financing needs. Thirdly, a new round of structural reforms on fiscal and tax system will be launched, and this would be unveiled during the Third Plenum this year. To us, these are incremental efforts by the Chinese government to shore up the economy. At the time of writing, the China’s central bank announced that the reserve requirement ratio for commercial banks will be reduced by 50 basis points from February 5. It has also reduced the relending and rediscount rate for bank loans designated for small firms and agricultural businesses by

25 basis points. These are positive moves in injecting much needed liquidity into the market, and we believe there could be more supportive measures to come in 2024. On balance, we are optimistic on the Chinese economy and the Chinese financial markets as the government looks to restore confidence.

This is a Presidential Election year for US and the outcome will have implications on how the US policymakers shape the market and economy. This is something we will not delve in greater detail as we do not really have sufficient insights to the domestic political challenges. We will only look at the economic and market directions as data evidence to guide our investment thinking. Our best guess is that the US economy is directionally looking inwards.

Market Outlook - December 2023

The equity market landscape remains unchanged since our last newsletter, where investors leaned towards developed markets. Although Asia Pacific markets also enjoyed positive returns, performance continued to trail behind despite noticeable improvements in economic data. We suspect that the fluctuations are mainly attributed to a tug-of-war between year-end tax-loss harvesting and window dressing by investment institutions. Historically, this short-term market volatility tends to persist into January as fund managers adjust their portfolios for reporting purposes.

Equity markets in major developed countries have experienced euphoria since the Fed decided to maintain interest rates for two meetings consecutively, signaling investor confidence that the interest rate cycle has finally peaked. At the same time, the long-anticipated recession scenario appears to be dissipating, with many economists now shifting their base case to a “soft-landing” scenario. Nonetheless, with inflation stubbornly staying above the Fed’s 2% inflation target, we believe that interest rates would continue to stay high. It is uncertain how the future economic landscape will emerge once US housing inflation has been dampened. We believe that the odds of a US recession is moderately high, but it should not culminate into a systemic event.

In the previous month, we briefly touched on the visit of China’s president (Xi Jinping) to the US where we saw positive outcomes. Firstly, China directly announced their commitment to continue peaceful cooperation with the US. Resumption of military talks after many months of radio silence showed China’s willingness to restore political ties with the US.

Additionally, Xi’s dinner with US business leaders was also positive, showcasing clear support from large US corporations despite geopolitical tension, from our perspective. We believe that US corporations still have strong intentions to operate in China over the long-term given their massive population. One of the notable developments since the event was the joint venture between Mastercard and China’s national transaction processor, NetsUnion Clearing. This initiative would allow Mastercard cardholders to enjoy seamless payments in China.

Despite these positive announcements, we also need to see firm, reciprocal actions from the US administration for us to be confident that geopolitical risk has reduced substantially. Our base case as of now is that geopolitical risk will remain a threat throughout 2024 due to the US presidential elections occurring late next year. During this period, we believe that both US Congressional parties will continue to emphasise China as their largest national security threat to achieve popularity.

We will also be seeing many other national elections (notably Taiwan) taking place around the world, and this will have implications on how things will shape up in various forms of conflicts and competition between US and China. As national security takes center stage among leading nations, we anticipate a gradual transition in global supply chains and capital movement over the long-term. This shift would likely result in increased fragmentation, favoring firms capable of maintaining market share and efficiency over the “reshoring” process.

In China, the Central Economic Work Conference has just concluded with policymakers setting a pro-growth stance for 2024, calling for more efforts to support economic growth and revive confidence. Over the last few months, the government has announced various supportive measures, be it monetary, fiscal or administrative. These moves were progressive and we believe they are growing in intensity. We expect the government to roll out more plans in the near term to stimulate the economy and address risks in the real estate sector.

Considering all the above factors, we continue to believe that Asia would continue to be the bright spot for economic growth in the global economy. A lower interest rate environment should also alleviate the tight liquidity situation around the world and bring about less interest-servicing burden on companies and individuals.

Market Outlook - November 2023

Regarding the humanitarian crisis between Israel and Hamas, our central scenario is that the war should not extend into a wider regional conflict given the military presence of two US aircraft carriers near Israel. Thus, we believe the impact to our portfolio and to the global economy should be minimal.

US economic data continues to display resilience during the month, and we believe there are two main contributors to this. Firstly, despite the Fed's tightening efforts since 2022, the US financial system maintains robust liquidity, prolonged by the impact of the massive COVID-19 stimulus, in our view. Secondly, extensive fiscal spending by the US government has offset the Fed's tightening measures. From our assessment, the US should still experience a decline in economic activity over the medium-term as we see liquidity tapering. Current economic forecasts for US GDP qoq growth is 0.7% for 4Q23 and 0.3% for 1Q24, signifying that the US should slowdown in the coming quarters.

China's recovery has gained notable momentum in recent months, evident in the upward trend in imports, retail sales and industrial output. Additionally, a significant RMB 1 trillion stimulus from the issuance of sovereign debt was announced by the administration. Despite this positive trajectory, investor sentiment remains indiscriminate, leading to depressed valuations relative to the US. From our perspective, the US continues to benefit from positive sentiment, particularly with the “Magnificent 7” names, where the potential of artificial intelligence continues to be the key driver of asset prices. Our constant assessment indicates that the prolonged valuation gap between the US and China is unsustainable, and we believe that over the medium-term, the gap should narrow in favour of China.

Japan remains an intriguing prospect with inflation seemingly supported by underlying demand after grappling with deflation for years. In response to the weakening economic data, their government has also recently approved a US$ 110 billion stimulus package to support private consumption. We anticipate this to translate into economic growth over the near-to-medium term.

In conclusion, our primary focus remains in Asia, where our thesis is reinforced by the recent uptrend in China’s economic data. The geopolitical risk between US-China has also decreased since the Biden-Xi meeting in San Francisco, where there were several agreements between both countries.

Market Outlook - October 2023

After a month since China relaxed their housing restrictions, overall home sales continued to be weak as consumer confidence has yet to be restored meaningfully. We believe that homebuyers in China will remain hesitant until the industry is able to contain the liquidity issues faced by property developers. This is a challenging issue to tackle as continued low sales will further worsen developer’s cashflow position, which in turn will affect consumer confidence. The administration will likely arrest this situation by issuing liquidity for developers to complete their projects. Through government actions, we believe that they can bring the housing situation under control. Aside from the ongoing geopolitical tension between China and the US, we see the property crisis as the last hurdle for an overall recovery, given the broader improving economic data and earnings resilience from the leading firms that we cover. We are also encouraged by the Chinese government continuous support for the economy through increased spendings, hence bigger budget deficit and more domestic investments. We are beginning to see early signs of the Chinese economy stabilising.

In early September, Huawei surprised the world by launching their Mate 60 Pro smartphone which carried a 7nm processor. Previously, the speculated limit for the Mate 60’s mass production using China’s existing technology was at 14nm. It is a clear win that China has produced this breakthrough internally despite continued semiconductor sanctions from the US. However, it remains to be seen whether China has the capability to mass produce such chips across multiple applications and further develop smaller nodes without access to cutting edge machines. With the current geopolitical landscape, we maintain our view that the US-China rivalry will continue and possibly intensify over the long-term.

Retail sales in the US surprised in September, growing 3.7% yoy. This came at the cost of lower consumer savings, dropping to levels not seen since before the global financial crisis. We attribute the sudden economic pick-up to be due to pent-up demand over the summer holidays. Thus, we think that the current consumption growth is unsustainable over the long-term. We have also been monitoring the employment situation in the US, where we observe weakening employment in the higher value-added industries such as finance, professional services and information technology. Therefore, we are wary of the short-term recovery in economic data.

Our base case remains that the fundamental prospects remain brighter within Asia. While developed countries undergo a period of slowing growth, we believe that the effects are non-systemic and will not have a detrimental effect to the rest of the world.

Market Outlook - September 2023

Since the Politburo meeting in July, the Chinese administration has released a slew of measures in an attempt to boost their economy. The most significant measures were the lowered interest rates, reduced banking reserve requirement ratios and relaxed housing restrictions for homebuyers. On the monetary policy front, we believe the policies considered will likely be released gradually and in a calculated manner, thus it would take time to see a major impact to the economy. Nevertheless, we believe that the administration are headed in the right direction to support the economy.

In China’s property sector, we believe the relaxation of housing restrictions in China are significant for two main reasons. Firstly, the downpayment requirements have been reduced dramatically to 20% and 30% for first and second-time homebuyers respectively. Prior to the change, first-time homebuyers had to fork out around 30%-35% of the property value as downpayment and second-time homebuyers had to pay up to 70%. Secondly, the classification of “second-time homebuyers” has been relaxed, where single homeowners who sell their existing property to purchase a new unit will still be considered “first-time homebuyers”, rather than second-time homebuyers. As pointed out earlier, first-time homebuyers enjoy a lower downpayment, as well as having access to cheaper mortgage rates. This would make properties more affordable, while freeing up cash for consumers to spend elsewhere. Initial sales reaction was encouraging as property sales saw a triple-digit percentage rate of increase week-on-week after the relaxation. We will be monitoring incoming data over the following months to confirm the trend.

Economic data in the US consumer data continues to decelerate, where consumer-related firms report weakening discretionary spend. Headline retail sales figures in August appeared resilient but was actually boosted by higher fuel prices paid by consumers. We continue to believe that the underlying trend of decelerating discretionary spend will continue. The notable discretionary sub-sectors that have demonstrated continued resilience has been recreational and travel spend. The post-COVID reopening demand is still strong globally and marks a useful reference for China when consumer confidence and outbound travel returns to the country.

Addressing the US equity market, which have outperformed due to the technology sector. Although we remain cautious due to overextended valuations, we are cognizant that sentiment will remain high as long as analyst forecasts and quarterly company guidance remains optimistic. The semiconductor industry trend has also been positive, as bottoming signs were seen from global chip sales improving sequentially. Our belief is that these factors would continue to support the overall tech sector globally at least in the near-term.

Market Outlook - August 2023

The major occurrence in China in July was the annual Politburo meeting. The participants announced a few key measures (both fiscal and monetary), namely continued support to the property sector, boosting consumption and restoring youth employment. These announcements were encouraging given the focus on critical issues in the country, however there were only a few details released on how the administration plans to execute these measures. We believe that the government has the capacity to act in a forceful way given their low national debt to GDP levels relative to other developed nations.

In the US, consumer spending continues to weaken, albeit at a much slower rate than expected. We are closely watching the resumption of student loan repayments from October onwards as this could have an immediate impact on consumption. Having said that, the overall US economy may be supported by one-off infrastructure spending in the near-term as evidenced by the recent GDP reading, spurred by major acts announced in preceding years such as the Bipartisan Infrastructure Bill, CHIPS Act and Inflation Reduction Act.

In general, we are finally seeing the highly anticipated slowdown in business activity and consumption globally, showcased by continued and deepening declines in export growth at major manufacturing countries. Thus far, the downtrend is not alarming with economists expecting a turnaround within the next twelve months. During this timeframe, current analysis suggests that businesses should have fully exhausted their existing inventories that they piled up over COVID-19, and therefore will have renewed demand to purchase again. On the other hand, the waning economy is also expected to cause the Fed to loosen their tight monetary policy, thus freeing up further propensity to spend. We will be monitoring these trends closely as we may be reaching a turning point over the coming quarters. This includes how the US Department of Treasury plans to increase the issuance of long-dated US Treasuries in the 4Q 2023.

Corporate earnings across sectors continue to show mixed results as expected, however they are mostly encouraging as both consumer and corporate spending has been more resilient than we originally anticipated. The beneficiaries are companies with a strong competitive position where they showed reacceleration in sales and even stronger earnings growth after cost-cutting in 2022. On the other hand, leveraged companies that we monitor are beginning to see the effects of interest rate hikes in a significant way, resulting in heightened borrowing costs offsetting sales growth. Finally, there is increasing pressure from consumers globally for firms to offer more value-for-money products as the cost of living has risen meaningfully since the start of the COVID pandemic. All-in-all the results thus far have been largely in-line or above expectations. We continue to expect outperformance in China once the government has issued clear policies to support their economy, especially on the property sector.

Market Outlook - July 2023

Looking forward towards the end of this year, our base case is that major Western economies should underperform as shown by their declining PMI numbers and slowing growth in corporate earnings. The risk of recession remains high in this region, in our view. We believe that the current rally in AI-related stocks is largely due to sentiment rather than fundamentals as most AI services are still at an introductory stage without a sustainable business model. Having said that, we always had conviction in the long-term adoption of AI technology.

Over in China, depressed consumer sentiment continues to be a challenge for the country despite the gradual improvement seen in the economy. Quantifiable factors still point to the weak property market and high unemployment rate for young adults. There has been news from state newspapers that officials will roll-out policies to support the real estate market and may also consider introducing measures to boost business confidence. Additionally, the recent shake-up at the People’s Bank of China where a new central bank chief was appointed, signals that the government should soon take action to support their currency and economy, in our view.

In other parts of Asia, Japan is staging a broad economic recovery since reopening its economy as foreign demand returns to the country. We also see certain ASEAN countries, such as Vietnam, to be a beneficiary of the “de-risking” trend from manufacturing hubs in China. These countries will also be under our watchlist going forward.

We maintain the view that Asian economies and corporate earnings will continue improving considerably from 2022 levels. Valuations in Asian markets are also fair-to-cheap relative to their long-term average. On the other hand, US equity markets will likely continue to post slowing growth, despite their fair-to-expensive valuation compared to their long-term average. In Europe, we are deeply concerned of the long-term effects caused by the Ukraine-Russia conflict and will be extremely selective if investing in this region.

Market Outlook - June 2023

The US market has stabilized and is currently enjoying an appreciation after the latest debt ceiling raise, calming nerves among investors. We are not as optimistic as there are still economic concerns still unresolved ranging from the still stubbornly high inflation, continued monetary tightening stance, weakening growth prospects to the wobbly banking sector. Furthermore, there is ongoing wrangling between US and China on various fronts, which may culminate into something negative in the long term. We are also monitoring the current market rise with some caution, as it was driven by only a handful of names in large cap growth stocks, while company earnings continued to be pressured by the negative impacts of credit tightening.

One of the biggest economic surprises of the year was China’s speedy reversal of its zero-COVID policy. Yet despite a strong rally since last October’s low, the Chinese market has given back most of this year’s gains. Concerns over the robustness of China’s economy and geopolitical risks have weighed on the market.

In our view, increased clarity on geopolitical risks and an earnings recovery should act as catalysts for Chinese equities in the months ahead. Sentiment can turn quickly in a market trading at depressed valuations. Market sentiment on China’s growth outlook has soured of late, in contrast to the burst of optimism after the end of Beijing’s zero-Covid policy. We believe the Chinese economy’s cyclical upturn is intact. The latest result releases have shown major Chinese companies reporting strong sales and earnings, and the profit recovery would continue to accelerate. The PBOC cut the 7-day reverse repo rate by 10 bps to 1.9% from 2.0% and the Medium-Term Lending Facility rate from 2.75% to 2.65%, a signal that the government is intent on shoring up the still-weak economy. We have little doubt that Chinese stocks are currently near its historic low and there isn’t much downside. Confidence would eventually return from continued recovery in both the economy and corporate earnings for the rest of the year.

Markets will continue to be buffeted by tension between China and the US and its allies. This is an issue market participants have to be aware of and endure for a long time to come. We think there would not be any letup by either country, especially on the Taiwan issue.

In our view, major power conflicts remain a tail risk due to the restraining influence of nuclear deterrence, and the likelihood of a direct military conflict between US and China remains a remote possibility. However, geopolitical rivalry and tensions will continue to escalate, spurring increase in defence expenditure, intensified competition over strategic commodities, and a shifting economic advantage towards neutral countries.

In other areas, Beijing instituted a ban on Micron Technology Inc in an escalating semiconductor war. Concurrently, the Group-of-Seven leaders meeting in Japan pushed ahead with efforts to reduce dependence on China for critical supply chains. Furthermore, there are talks of a potential US executive order limiting outbound investment to sensitive high-tech Chinese sectors, igniting fears that this measure could be broad in scope which could affect many companies in both countries. “Non-hot-war” news like this would be our focus, as these are highly probable events that would eventuate between the two superpowers of the world.

Market Outlook - May 2023

The month of April witnessed another major regional bank collapse, namely First Republic Bank. Their assets have since been seized by regulators with JP Morgan taking up most of the assets. The Federal Deposit Insurance Corporation agreed to absorb most of the losses on mortgages and commercial loans that JP Morgan is inheriting, in addition to providing a $50 billion credit line. After reassessing the situation, we maintain the view that the crisis remains contained, primarily due to the prompt actions taken by regulators to prevent contagion. Furthermore, systemically important banks have continued to attract inflows, ultimately benefiting from regional banking outflows. The fallout from this episode would likely lead to a tighter lending stance by US banks.

In contrast to the 2008 financial crisis, assets held by these regional banks are of higher quality, consisting of mostly US treasuries, bonds and investment properties. This is unlike 2008, where banks were burdened with excessive leverage and relatively low-quality assets from subprime mortgage-backed securities. As a result, we also believe that asset quality in US banks is not a major issue at this stage. Monitoring consumer confidence in the US banking system is the key factor for us regarding this issue, which seems fine at this juncture.

Two months after China released their 12-point peace proposal between Russia and Ukraine, leaders from both these countries have had separate talks with China’s president, Xi Jinping. We view this as a potential starting point for negotiations to resume and we will closely monitor developments as they unfold. If the conflict is halted, it would likely have downward implications on commodity prices as supply issues are expected to alleviate. Additionally, this should lead to further disinflation globally, a potential catalyst for a rally in equity markets.

Another topical issue is the US debt ceiling, which is causing concerns regarding a potential default on US debt if negotiations between Republicans and Democrats fail to reach a timely resolution. Drawing from historical events, our take is that both parties would take measures to ultimately avert a default.

Since the onset of the regional banking crisis, US equity market participants have positioned for the Fed to start cutting interest rates in the second half of 2023. This has resulted in rallies for large US-based technology firms. We are cautious about this rally due to weakening signs of economic data and conservative guidance given by most firms. Furthermore, the rebound is not broad-based and has mainly benefited large technology firms, which leads us to believe that the underlying economy in the US is facing challenges.

China’s equity markets on the other hand, have seen a noticeable decrease in investor enthusiasm as their recovery continues to be gradual, rather than an immediate surge in demand. China’s government has also been prudent in taking significant policy actions to stimulate the economy, despite softer-than-expected demand. We believe this conservative policy stance is aimed at keeping inflation and asset prices under control. Contrary to the US however, earnings growth in China continues to improve, while providing attractive valuations. Therefore, we continue to believe that China has a more attractive risk-reward trade from a fundamental standpoint.

Market Outlook - April 2023

In the previous update, we addressed immediate concerns regarding the US’ and Swiss’ banking sector and continue to believe that the systemic risk has been contained effectively. As a result of these events, there have been concerns from analysts on the overall health of the US economy over the medium-term. We believe that we are currently going through a turning point and will continue to closely monitor economic data and corporate earnings to corroborate our outlook on the global economy. To us, this is also the outcome of a new asset pricing regime as interest rates return to normal and central bank liquidity tightens. Investors will correspondingly adjust their risk-return considerations in this new normal.

We would like to briefly address China’s post-reopening recovery, which has been slower than our expectations thus far. We strongly suspect this is the result of a severely weakened consumer sentiment in China as a result of the COVID lockdowns throughout 2022. Aside from that, monetary policy was not loosened massively to stimulate consumer spending, unlike in most developed countries. We expect China’s recovery to ramp up once consumer sentiment returns. One silver lining is that retail sales have recently accelerated in China, increasing by 10.6% year-on-year in March.

There has been increasing tension on the technological front between China and major developed countries. Japan officially announced plans to restrict exports of 23 types of semiconductor equipment to about 160 destinations, including China. Exports to these countries will require approval from Japan’s trade ministry. We also notice China has been increasingly protective of their leading technologies, such as electric vehicle batteries, photovoltaic panels and rare earth metals. We view export restrictions as a growing risk that could expand into additional industries moving forward. We have already been mindful of having large exposures in these industries since the US escalated their semiconductor export bans against China last year.

Our outlook is that growth in Asia continues to look more attractive than developed markets given the near-term recovery from China’s reopening, domestic economic recovery and resumption of foreign direct investments in the region. Having said that, we will maintain a nimble stance in the face of significant uncertainty in the global landscape.

Market Outlook - March 2023

As more economic data is released, we believe that the severity of the recession in the US could be deeper than previously expected. For example, retail sales on a nominal basis in the US are said to be robust by media coverage, however it is worth mentioning that real retail sales have been stagnant since mid-2021. This implies that growing retail sales is a result of price inflation, rather than strong consumer demand. In addition, household savings as a percentage of disposable income and money supply growth in the US are currently at similar or lower levels than in 2008.

Notable developments have occurred at the time of writing, starting with the collapse of a few regional banks in the US and significant concerns on Credit Suisse’s financial standing. We believe the collapse of the regional banks was largely due to the aggressive rate hikes by the Fed, leading to worsening capital positions. We are monitoring the situation closely as this is a classic case of a bank run, which could pose a serious threat to the global financial system.

Our take is that the situation should be under control as the Federal Deposit Insurance Corporation in the US have announced that they will insure all customer deposits for Silicon Valley Bank in a bid to prevent further panic. Additional funding was also made available by the Fed via the creation of a new Bank Term Funding Program, which we believe will prevent any further liquidity crunches. For Credit Suisse, the risk has also been contained, in our view, as they will be acquired by UBS, with additional funding provided by the Swiss National Bank to UBS as part of the deal.

Towards the end of the February, China released a 12-point proposal regarding the Ukraine crisis. The initial response from both Russia and Ukraine has been positive as their leaders are planning to have further discussions with China. This is another development that we are watching closely as it could free up the last major supply constraint globally. We expect commodity prices to normalise further if China is successful in brokering a peace deal between the two countries. This could also improve China’s credibility greatly, leading to better standing in the global political scene. We have already seen China’s reliability in foreign relations after they successfully brokered a reconciliation between Saudi Arabia and Iran. These events may be crucial for China in an increasingly divided world between the US and China.

China’s GDP growth target from their two sessions was 5.0% year-on-year. This is considered a modest target compared to historical targets, signalling economic challenges for the global manufacturing hub. Despite this, the long-term outlook for Asia still outshines that of Western countries from a relative standpoint. Over the near-term, we will continue to monitor the major issues highlighted to ensure that we are safely positioned in case of a systemic risk.

Market Outlook - February 2023

Coming into 2023, analysts remain divided in terms of where the global economy is headed. Many agree that a recession in major developed countries is looming, but the severity and spillover effects to the global economy has been largely debated. We believe this disparity can be attributed to conflicting economic data, such as declining consumer demand clashing with a robust labour market. This has led to a precarious situation where it is uncertain if the US Federal Reserve (“Fed”) has already overtightened their monetary policy.

With our current read on the market, our base case is still a recession in developed countries, but we do not think that a severe recession is in store and could see economic data bottoming out before the end of 2023. There have been concerns on China’s reopening causing an inflation spike, however we believe that with the removal of zero-COVID policies, supply chains should ease and balance out with demand.

Towards the end of the month, tensions between the US and China rose again due to the discovery of a Chinese surveillance balloon over the US’ military zones. This caused relations to sour as US diplomat, Antony Blinken, has postponed his visit to China indefinitely. We expect the current status quo of heightened geopolitical risk to continue and cause increased uncertainty in financial markets.

Over in China, clear indication of regulatory easing was seen in their technology industry, where a total of 88 new video games were approved in January, after 128 games were approved in December. Ant Group’s consumer finance unit also received approval from regulators to increase their registered capital by more than double, a relief for the company that has been under regulatory scrutiny since its initial public offering was abruptly halted in 2020.

General market expectations seem to be pricing in a mild recession, with markets expecting possible interest rate cuts before the end of this year. This is despite the Fed continuing to message that they will maintain their hawkish stance as long as inflation stays high. This mismatch between the Fed’s hawkish stance and the market’s dovish expectations on interest rates could be a potential risk for developed markets in the near-term, in our view. On the back of this uncertainty, we stick with our thesis to remain more constructive on Asia due to the expected recovery from China’s reopening.

Market Outlook - January 2023

The outlook for 2023 continues to favour Asia when compared to developed countries. The International Monetary Fund has forecasted China’s gross domestic product (“GDP”) to grow by 4.4% year-on-year versus the US’ forecasted growth of 1.0% year-on-year. This would be a significant improvement for China as their GDP growth for 2022 was only 3.0% year-on-year.

The most prominent event for December was when China decided to remove most preventive measures for international travel, after three years of Covid restrictions. We view this as a positive for the Asia region as the reopening came much sooner than most analysts expected. Although there are short-term labour issues due to a spike in Covid cases, we believe the faster reopening will result in quicker earnings recoveries across most sectors in China.

China’s leadership has also publicly announced their determination to support the economy for 2023. Key issues to highlight include further support to the property sector, easing regulatory environment for the technology sector and increased transparency for listed state-owned enterprises. We remain positive on China on the back of these encouraging actions.

Surrounding Asian countries will also benefit from the reopening as consumer and commercial spending improves in the region. We expect to gradually see a shift from goods spending to services, as we saw in developed countries when they first reopened their economies.

With regards to the semiconductor controls against China, Japan and the Netherlands have indicated that they will adopt some US measures to join the export ban on China. We expect the fierce competition for semiconductor leadership between developed countries to continue for the foreseeable future. Despite the massive inflows of investments, this is negative for the semiconductor sector, in our view, as uncertainty in execution and inefficiencies will arise from these countries attempting to build their own supply chain.

In the US and Europe, our outlook remains negative for the first half of 2023 as they are still tightening their monetary policy. Despite inflation cooling slightly in the US, their robust job market could cause inflation to stay elevated. This leads us to believe that higher interest rates and lower economic activity could linger for a while more before a recovery is in sight.

Our thesis between developed markets and Asia is unchanged, we still expect risk assets in the developed markets to bottom out and stage a broad recovery as we make our way past peak Fed hawkishness and inflation decelerates more markedly in later part of 2023.

We adopt more positive views on the Asian markets, especially Chinese securities. We are hopeful that Asia will enjoy an accelerated recovery from China’s reopening as spending and investment in the region picks-up.

Market Outlook - December 2022

With recessionary conditions likely to emerge across much of the developed world in 2023, this looks to be a decent outcome for Asia in the near to medium term as investors seek for higher returns as its equity premium appears to be relatively more attractive.

The US and European economies would continue to weaken at least to the first half of 2023 given the recent economic readings we have seen. At the same time, these economies are still muddling through a tightening monetary policy regime with high inflation still to be effectively tamed. We are unsure how the economic damage would be like after this tightening phase.

The outcome of the US midterm elections is now conclusive, following the Republicans taking control of the House of Representatives, albeit by a smaller-than-expected margin. This could result in some headwinds to fiscal spending.

On the other hand, we are optimistic on the Asian markets and economies as we believe a market bottom has been formed. China’s October activity data indicated slowing economic growth and greater slack in the job market. However, these are backward-looking, and financial markets are likely to look through the soft near-term data given recent positive policy signals on zero-COVID and the property sector.

Despite near-term challenges, our base case is that China will exit its dynamic zero-COVID regime next year, as authorities lay the groundwork on areas like vaccination. We have seen follow-up measures after local media reporting of 16 measures from regulators which aims to solve property market issues. These measures include the People’s Bank of China (“PBOC”) and the China Banking and Insurance Regulatory Commission asking commercial banks to loosen presales escrow account for developers, which can withdraw more cash from the accounts if they meet some criteria. We expect to see more follow up measures in the near future. The PBOC has also announced a reserve requirement ratio cut, a policy signal that monetary policy will remain supportive to stabilise growth.

On the geopolitical front, the US-China relations should remain contentious. While a full economic decoupling is not realistic, the US will be pursuing industrial policies that would curb exports to China on areas like artificial intelligence, quantum computing and biotech.

The investment environment in 2023 for the developed markets is likely to remain highly uncertain given the lagged impact of rate hikes, sticky inflation and unfavourable earnings outlook. We believe the worst for developed markets in terms of growth and earnings are ahead, and risk asset valuations currently have not deteriorated sufficiently to reflect this.

Market inflection points historically take place before the end of recessions. Looking ahead, we expect risk assets in the developed markets to bottom out and stage a broad recovery as we make our way past peak Fed hawkishness and inflation decelerates more markedly in later part of 2023.

We adopt more positive views on the Asian markets, especially Chinese securities. We are hopeful that the Asian equities should stage a meaningful recovery from now on since its recent bottom in October.

Market Outlook - November 2022

2022 has witnessed significant market upheavals, with investors having to grapple with inflationary pressures, tightening financial conditions and geopolitical concerns. We shall zoom in to look closely at the Chinese economy as the Chinese equities markets had a major decline in the month of October.

After the recent sharp sell-off in China, we believe the markets are likely reflecting excessive pessimism. Credit growth posted a broad-based slowdown in October, likely reflecting weak demand, including lingering weakness in the housing market, and the Chinese government persistence stance on their zero-Covid policy.

From our perspective, China does not have an inflation problem. Bumpy growth and low inflation mean the central bank has the runway to continue easing policy, including tolerating a weaker trade-weighted CNY to support China’s export competitiveness and to boost domestic demand.

We continue to be optimistic on the Chinese financial markets with the views that the economy is at the tail-end of the economic downcycle and would be on a steady road to recovery for the following reasons:

Firstly, we are encouraged to see the Covid policy recalibration as it means more flexibility in handling outbreaks and less disruption to the economy. Actual implementation remains to be seen, given current severe situations in multiple cities like Guangzhou. In our view, the implementation of this policy is a move in the right direction towards improving economic activity.

Secondly, the People’s Bank of China (“PBOC”) and China Banking and Insurance Regulatory Commission (“CBIRC”) jointly announced a slew of measures to provide financial support to private corporates in an attempt to revive the property market. It includes 16 measures which aim to ease developers’ liquidity pressure by 1) supporting their refinancing, 2) allowing them to delay debt repayment, and 3) encouraging financial institutions (mainly banks) to lend more to developers. This is a big improvement compared to last few months piecemeal steps. We believe this should bring a halt to the property downward slide in the near term and alleviate a potential systemic pressure on the Chinese economy. In the meantime, we will monitor the homebuyer sentiment for any notable pickup in the real estate market. This takes time and the moment there are green shoots appearing, it should help in the improvement in the Chinese financial market.

Lastly, a highly unified government could lead to more effective policy execution and co-ordination in the midst of sluggish growth. President Xi Jinping secured his position as the leader of China in the 20th Party Congress, and have also appeared to keep his close allies firmly in place in the Politburo. In our opinion, this allows the current leadership to push forward economic policies strongly and more confidently.

On the other hand, we see the US economy and financial markets on a weakening trend in the medium term. The US Federal Reserve continues to be on a relentless trend in raising interest rate to tame inflation. It has delivered four consecutive increases of 0.75% this year with no sign of abating in the near term. The silver lining came from the latest collection of anecdotes from the Beige Book. It noted that inflation has eased somewhat and is expected to continue to ease further, an indication that the Federal Reserve aggressive monetary policy tightening may have started to take effect. However, this comes at the cost of slowing economic growth. 3Q earnings reporting season is currently underway with a fairly mixed set of corporate results. While consumption appears broadly resilient, especially in travel, pockets of cracks are appearing in the sales of goods. Results from mega-cap tech names have thus far been disappointing on the back of elevated expenses, currency headwinds, and cyclical advertising weakness.

In the US midterm elections, third party data suggest that a divided government is the most likely outcome. Consequences of a divided US Congress will mean a paralysis of domestic policies in the next two years, and we should not expect supportive policies to cushion the headwinds from tight monetary policy.

Meanwhile, the largest nations in the Group of Twenty (“G20”) were at odds with each other in the last several years. The G20 summit held in Jakarta recently, offered some hope that there is possibility of a thawing in relationships, especially between the US and China. We shall stay tune to future global developments.

In summary, we believe there is a decoupling in the global economy with the Asian economies at the tail-end of its decline with recovery in sight, and the developed economies still on the path of economic decline in the medium term. We continue to position ourselves with emphasis on the Asian economies and keeping an eye on the developments in the developed world.