Insights

Resurgence of Chinese Stocks

In September 2024, The Federal Reserve initiated its rate-cutting cycle with an assertive 50 bps reduction, a bolder step compared to other leading central banks. Fed Chair Jerome Powell emphasized that this decisive action was aimed at “maintaining the strength we currently see” in the U.S. economy, rather than responding to concerns about an impending recession. He noted that beginning the easing cycle with such a “good strong start” was made possible by the Fed’s increased confidence that inflation was on a sustainable path back to its 2% target [1]. This approach signaled the Fed’s commitment to fostering economic stability while carefully navigating the challenges ahead.

Meanwhile, the Swiss National Bank echoed steps to lower borrowing costs by the US Fed, reducing interest rates by 25 bps. This brought the rate down to 1.00%, the lowest level since early 2023 [2]. The cut was its third such reduction this year as the central bank dialed back measures designed to combat inflation.

Lastly, on 24 September 2024, China’s central bank announced its largest stimulus package since the pandemic, aiming to lift the economy out of deflation and steering it back towards the government’s GDP growth target of “around 5%.” [3]  The People’s Bank of China (“PBoC”) adopted a more accommodative monetary policy, cutting the 7-day reverse repo rate by 20 bps to 1.5%, thus lowering deposit rates to help mitigate the impact on banks’ net interest margins. In a further effort to inject liquidity, the central bank reduced the reserve requirement ratio (“RRR”) by 50 bps, freeing up additional capital for lending. Alongside these moves, new measures were introduced to revitalize the sluggish property, including a 50 bps reduction on average interest rates for existing mortgages, and a cut in the minimum downpayment requirement to 15% on all types of homes, among other measures. The PBoC also introduced tools to boost the capital market, with at least CNY 500 billion allocated to directly support the stock market [4]. This comprehensive stimulus package underscores the PBoC’s commitment to jump-starting economic recovery and restoring confidence across key sectors.

 Views on Equities

Following Fed’s decisive move to lower rates by 50 bps, it has catalysed a swift recovery in U.S. equity markets, with major indices like the Dow Jones Industrial Average and the S&P 500 surging to new all-time highs. Investors are responding positively, buoyed by optimism that the economy is on track for a soft landing and that further rate cuts could be in store.

However, as we head into the final quarter of 2024, several uncertainties loom on the horizon, including the upcoming U.S. elections, rising geopolitical tensions, and concerns over a potential economic slowdown. These factors could inject volatility into the markets, making Q4 a period to watch closely. Despite these headwinds, we maintain a constructive outlook on U.S. equities, driven by the Fed’s shift toward a more accommodative policy and continued momentum in high-growth sectors like artificial intelligence.

Our base case anticipates a soft landing for the U.S. economy, supported by further rate cuts that should help sustain the ongoing recovery. Recent inflation data, such as the Personal Consumption Expenditures (“PCE”) price index, which rose by 2.2% year-over-year in August—below the expected 2.3% and down from 2.5% in the previous month—signals broad-based disinflation [5]. This trend indicates that the Federal Reserve is making steady progress toward its 2% inflation target. With inflationary pressures easing, the Fed can now shift its focus to managing downside risks in the labor market, aiming to prevent further weakening and ensure economic stability. In this soft-landing scenario, we anticipate that equities will continue to deliver strong returns, supported by the Fed’s accommodative stance and improving economic conditions, as outlined in the table below.

Moving to Asia, following a robust set of stimulus measures aimed to jumpstarting the China’s economy, China/HK equities rallied. The CSI 300 Index of big Chinese companies traded in Shanghai or Shenzhen was up 15.7 percent in a week, posting their biggest single-week gain since November 2008 [6].

The recent rally in China/HK Equities could partially be attributed to short covering [7], as bearish institutional investors who had bet against the market, were caught wrongfooted and forced to liquidate their positions amidst the strong equity rally. As in the months leading up to the rally, negative sentiment had built up around Chinese stocks, particularly due to concerns over the country’s slow economic recovery, the continued struggles in the housing sector, and limited government stimulus which led to an increase in short positions as many investors anticipated further declines.

Given the scope of these interventions, we revised our outlook and upgraded our position on China/HK equities to overweight, reflecting our renewed confidence in the region’s recovery potential. In our opinion, based on the available information, we believe the scale and focus of these measures, particularly the targeted liquidity injection, address the critical issue of insufficient domestic capital flows into China’s stock market. In our opinion, previously, the environment of elevated real interest rates incentivized bank deposits over higher-risk investments. However, with the new policy framework, we expect a shift towards greater market participation, which should bolster equity performance.

Furthermore, net allocations in China equities remain at lows across both hedge funds and mutual funds, despite the recent rally [8]. With a more constructive backdrop for China equities due to the recent stimulus, we expect greater institutional flows from emerging markets such as Japan and India. The combination of greater domestic capital flows and institutional flows could mark a turning point, positioning China and Hong Kong equities for further upside potential.

We remain selective in our approach as we see opportunities in industry leaders with strong fundamentals and robust capital return strategies, particularly in the EV and internet sectors. These sectors have shown upward earnings revisions, and companies with competitive advantages in these spaces could outperform in the short term. Additionally, we favor sectors with higher earnings visibility and defensive dividend yields, such as utilities, energy, telecoms, and financials. These sectors stand to benefit from ongoing SOE reforms and a lower interest rate environment, making them attractive plays in the current climate. Despite our bullish sentiments, it is crucial to note that consumer confidence remains subdued in China. Recent data such as the Caixin/S&P Global services purchasing managers’ index (“PMI”) dropped to 50.3 in September from 51.6 in August 2024, the lowest since September 2023 [9]. In order to make this a more sustainable bull market run, we need to see more improvements in the fundamentals and economic data from China.

Views on Fixed Income

With moderating economic growth, an easing monetary policy, and inflation gradually approaching the 2% target, the environment for bonds remains supportive. However, given the recent decline in yields, the potential for near-term capital appreciation may be somewhat constrained. Despite this, we maintain a positive outlook on investment-grade corporate credit cash into high-quality fixed income as the global rate-cutting cycle unfolds. To enhance portfolio resilience and income, investors should consider a diversified fixed-income approach, including selective exposure to higher-yielding assets, which can provide a valuable boost to overall returns.

 Views on Currency

The U.S. dollar surged to a seven-week high on October 2024, poised to achieve its strongest weekly performance since September 2022 [10]. This rally was fueled by a surprisingly robust jobs report for September, which prompted traders to scale back expectations of further aggressive rate cuts by the Federal Reserve. U.S. nonfarm payrolls rose by an impressive 254,000 last month, significantly exceeding the 140,000 jobs forecasted by economists in a Reuters poll. Additionally, the unemployment rate unexpectedly dipped to 4.1% from 4.2% in August [11]. As a result, traders now assign a 97% probability that the Fed will opt for a more measured rate cut of just 25 bps in November, according to the CME Group’s FedWatch Tool as of 7 October 2024 [12]. Adding to the dollar’s strength, its safe-haven appeal has been amplified by the rising geopolitical tensions in the Middle East, further bolstering its value.

With the Federal Reserve’s recent rate cut on 18 September 2024, gold surged to a historic high of $2,685 per ounce. The precious metal has now climbed over 27% since the beginning of the year, setting it on course for its strongest annual performance in 14 years. This remarkable rally underscores growing investor concerns, as many investors seek refuge in safe-haven assets amid increasing economic volatility. With U.S. government spending now at 43% of GDP—a level last seen during the 2008 financial crisis—gold has emerged as a critical hedge against rising inflation and systemic instability. The geopolitical backdrop has further stoked demand for gold, with escalating conflicts in Ukraine and Israel, coupled with uncertainty surrounding the upcoming U.S. presidential election, prompting heightened risk aversion. Central banks, wary of these growing risks, have significantly bolstered their reserves, tripling gold purchases since the onset of the Ukraine conflict, according to a recent Goldman Sachs report [13].

Below is what we think about the currency market:

• Japanese Yen (“JPY”): New Japanese premier Shigeru Ishiba stunned markets this week when he said the economy was not ready for further rate hikes, an apparent about-face from his previous support for the Bank of Japan’s (“BOJ”) unwinding decades of extreme monetary stimulus [14]. This unexpected shift signals a dovish outlook, leading us to anticipate that the BOJ will hold off on raising rates at its upcoming 30-31 October 2024 meeting. Amid this softer policy stance and the ongoing strength of the U.S. dollar, we foresee continued downward pressure on the yen in the near term.
  
  
• Swiss France (“CHF”): Swiss National Bank (“SNB”) Chairman Martin Schlegel recently hinted at the potential for interest rates to return to negative territory, given that risks to Swiss inflation remain skewed to the downside [15]. These dovish remarks, coupled with the SNB’s recent rate cut and the growing expectation of another reduction in December, suggest a continued weakening of the Swiss franc. In light of this, we maintain our preference for the CHF as a funding currency.
  
  
• British Pound (“GBP”) & Euro (“EUR”):  There has been increasing expectations that the European Central Bank will cut rates at 17 October 2024 meeting as inflation recedes with similar situation in GBP as Bank Of England Andrew Bailey said that the British central bank could move more aggressively to cut interest rates if inflation continue to weaken [16]. We expect these currencies to trade on the weaker side.

Source:

[1] Transcript: Fed Chief Jerome Powell’s Postmeeting Press Conference – WSJ
[2] Swiss central bank lowers rates and flags further cuts as inflation eases (businesstimes.com.sg)
[3] China unveils fresh stimulus to boost ailing economy – CNA (channelnewsasia.com)
[4] China’s central bank unveils most aggressive stimulus since pandemic | Reuters
[5] A dual win for consumers: Inflation cooled last month, paving way for borrowing costs to come down more | CNN Business
[6] China stocks soar most since 2008 on stimulus blitz to enter bull market | The Straits Times
[7] Hong Kong Stock Rally Likely Driven by Short Covering, JPMorgan Says – Bloomberg
[8] Hedge fund allocations to China hit five-year low (yahoo.com)
[9] China’s services activity slows, Caixin PMI shows | Reuters
[10] Strong jobs report propels dollar to best week since 2022 – CNA (channelnewsasia.com)
[11] September Jobs Report: Nonfarm Payrolls Beat Estimates, Unemployment Falls – Business Insider
[12] CME FedWatch – CME Group
[13] Gold prices forecast to climb to record high | Goldman Sachs
[14]  BOJ’s rate hike plans face political curve ball | Reuters
[15] Swiss National Bank’s new chairman does not rule out negative rates | Reuters
[16] BOE’s Bailey raises prospect of more aggressive rate cuts (businesstimes.com.sg)