In February, both S&P500 & NASDAQ are up more than 4% supported by the strong AI demand. With NVDA delivering a clear beat for F4Q23 earnings as outstanding Data Center sales (+27% q/q) drove margin outperformance. Revenue for F1Q24 is expected to be around US$24 billion vs consensus: US$21.5 billion), indicating sustained strong demand for its GPU because of next-generation AI developments[1]. The strong quarter for NVDA demonstrated capacity for gen AI to transfer demand into meaningful revenue growth. This leads the way for the AI-related companies that are focused on hardware and software.

Good news follows in Asia, as the Japanese stock market has surpassed the record level set during the nation’s asset bubble in the late 1980s. A strong rebound during 2024, fuelled by increases in chip-related firms including Screen, Tokyo Electron, and Advantest, pushed the Nikkei 225 index passed its 38,915-record level on 22 Feb[2]. With Japan converging towards developed markets norms, the Japan market is currently trading slightly under the 3Y Average P/E of 17.7x[3] and we will expect higher return on equity which can potentially lead to further re-rating.


With U.S. January CPI rising 0.305% m/m[4], faster than expected, this blew away any chance of an earlier rate cut as Waller mentioned that the upcoming months of data will be crucial to confirm that January was a fluke and that we are still on track for price stability[5]. Goldman Sachs has also pushed back its forecast for the first Fed rate cut to May from March given Powell’s comments at the January press conference[6]. As inflation falls, financial conditions loosen which is unfavourable at full employment, hence we are cautious as there may be a potential inflation upside risk.

For cryptocurrency, BTC pushed past US$60,000 level for the first time in more than 2 years. With more than 40% returns YTD[7], this rally is largely triggered due to the successful launch of BTC ETFs which attracted more than US$6bn and the upcoming bitcoin halving in April 2024. This surge in demand has outstripped the supply of the cryptocurrency and the surge is likely to continue with a long-term bullish trend.

For commodities, we continue to view Gold as a good hedge. As global Gold ETFs continue its 8th consecutive months of outflow, gold prices declined as the market retreated from bets on early rate cuts by major central banks[8]. With the implied volatility of call options on Gold currently at historically low levels, investors may find it worthwhile to explore the potential role of Gold within their investment portfolios. However, investors should assess their unique situation and consulting your client advisor for tailored advice.

Views on Fixed Income

U.S. Treasury yields are generally higher after reports showed the US economy expanded steadily in February 2024. 2-year Treasuries increased 19 basis points to 4.664%, while 10-year Treasuries added 15 basis points to 4.32%[9]. Economic data released showed that weekly initial jobless-benefit claims fell to a five-week low of 201,000 in mid-February, indicating that the labour market is still healthy.

We continue to favour short-term investment-grade bonds at current yields. For US/Europe IG bonds, we favour bank & financials and energy firms. Outside of U.S, we see that Asian IG sovereign bonds’ average credit spreads tightened which signifies a good opportunity for investors who are looking towards increasing their allocation to fixed income.

Views on Equities

The continued outperformance in U.S. equities fuelled by the “Magnificent 7” (Seven U.S. biggest technology-focused companies: NVDA, AAPL, MSFT, TSLA, AMZN, META, GOOGL) has led to investors searching for opportunities in other sectors and markets. According to Goldman Sachs, investors have been locking profits from tech and seeing the largest inflow in 10 weeks into consumer staples stocks[10]. We believe that the European Granolas (GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LVMH, AstraZeneca, SAP, and Sanofi) can potentially attract more attention from investors. With the Granolas outperforming the “Magnificent 7” over the past two years (refer to graph), Granolas currently trades at a 20x P/E (30% lower than “Magnificent 7”) and a volatility 2x lower which presents better risk-adjusted opportunities for investors[11].

Moving to Asia, the HK government has recently announced that it will abolish property cooling regulations to restimulate the lacklustre property market. Cooling measures include the removal of special stamp duty, buyer’s stamp duty and new residential stamp duty on any residential property transactions. The stock market has reacted positively with HK developers such as New World Development Co. jumping more than 8%[12]. If this is coupled with a rate-cutting cycle and changes to mortgage rules by the HKMA, we can expect that the Hong Kong property market will likely see a rebound.

Views on Currency

In February, we saw the U.S. Dollar Index (DXY) trading wildly from a low of 102.09 (02 Feb 2024) to 104.97 (14 Feb 2024) as a data driven markets kept traders on their toes. FED FOMC (31Jan/01Feb) came as markets curtail their expectation of an aggressive rates cuts by the FED. A slew of Fed officials’ speech and views in February 2024 echoed FED Chair’s sentiments that they are not in a hurry to cut rates leaving March 2024 meeting a non-event. Meanwhile throughout February 2024 the dollar remains supportive as data release continue to show a resilient economy despite data showing a possible slowdown in inflation pressure.

Meanwhile, volatilities continued to trend lower as funding currencies were generally weaker throughout the month. JPY traded above 150 once again and remained there towards the end of February 2024, prompting verbal warnings from Japanese authorities on unwanted and “excessive” weakness[13]. The Chinese Yuan (CNH) was back to the weaker side.  Here is our perspective:

• Japanese Yen (JPY): The JPY has seen minimal change recently despite the contraction of the Japanese economy at the end of last year, defying expectations for modest growth and pushing the country into a recession[14]. This development complicates the upcoming decision from the Bank of Japan (BOJ) regarding the possibility of the country’s first interest rate increase since 2007 in Apr. We think JPY will likely trade in range and is currently leaning towards the weaker side. We anticipate that the BOJ‘s rhetoric should keep the weakness in check.  Potential range is expected to be between 145-151.

• British Pound (GBP): BOE starts February 2024 with a policy meeting (02 Feb 2024) which they adopted a “wait and see” attitude with a slightly hawkish bias. Looking ahead, we anticipate further consolidation, with a potential trading range of 1.25 to 1.30, albeit with a bias towards the downside.

• Euro (EUR): February 2024 data in euro-zone were mixed but more importantly the Big German economy seems to show much more weakness. Meanwhile as with the FED, policymakers are unsure on the timing of a rate cut or not at all although markets continue to price for a cut in April 2024. Nothing new here as Euro continues to trade on the weaker side in a lower sideways pattern. Potential range is 1.06-1.10.

• Swiss Franc (CHF): The currency is likely to consolidate around the 0.86-0.89 range.

Source:

[1] Nvidia Is Blowing Expectations Out of the Water — Is It Too Late to Buy the Red-Hot Artificial Intelligence (AI) Stock? (yahoo.com)
[2] Japan’s stock market passes record closing level after 34 years – FT中文网 (ftchinese.com)
[3] Japanese (NIKKEI) Market Analysis & Valuation – Updated Today (simplywall.st)
[4] CPI inflation January 2024: Consumer prices rose 0.3%, more than expected; annual rate at 3.1% (cnbc.com)
[5] Fed’s Christopher Waller Urges Patience on Rate Cuts After Jump in Prices – Bloomberg
[6] Goldman Sachs Pushes Back Bet on First Fed Interest-Rate Cut to June – Bloomberg
[7] Why Is Bitcoin Going Up? – Forbes Advisor
[8] 2024 began with continued outflows | World Gold Council
[9] 10-year Treasury yield shoots higher as January CPI is hotter than expected (cnbc.com)
[10] HEDGE FLOW Hedge funds call time on tech rally, banks say | Reuters
[11] GRANOLAS stocks power Europe to record highs, drawing Magnificent 7 comparisons (cnbc.com)
[12] Hong Kong Scraps Property Curbs and Raises Taxes for Highest Earners (yahoo.com)
[13] Japan issues fresh warning against excessive yen moves (msn.com)
[14] Japan’s Economy Slips Into Recession and to No. 4 in Global Ranking – The New York Times (nytimes.com)

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