Divergence Opens Up Investment Opportunities; Prudent Stock Selection is Key




  • US tech shares lead, buoyed by US dominance in tech and AI development
  • Monetary policy normalisation, reasonable valuations and corporate reform support Japanese equities
  • Chinese value stocks appealing, such as banks and oil plays
  • India's policy will likely remain stable; high infrastructure investment to benefit economic growth

The Fed now expects to cut interest rates only once this year, signalling long-term rates will likely stay elevated for longer. The timing of a US rate cut remains unclear, but Europe and Canada have already lowered their interest rates, whereas Japan raised rates for the first time in 17 years in response to its long-lost inflation. Indonesia unexpectedly hiked rates in April to shore up its currency. Global rates remain persistently high, with consumer prices in many countries still standing well above central banks targets. The resilience across world economies continues to surprise.


World Economies Exhibit Resilience; Country Divergence Warrants Prudence in Stock Selection

The International Monetary Fund forecasts global GDP to rise by 3.2% this year and next . Economic growth in many countries is strengthening while inflation is steadily in decline. The likelihood of a US hard landing is deemed low; Thus, BEA Union Investment holds an optimistic view on equities. However, economic divergence across markets means stock selection is of pertinence at this juncture. Currently, we remain a constructive stance towards strategic US tech stocks, select Japanese equities, high-yielding Chinese value shares, and certain Indian stocks poised for structural growth.


Select US Artificial Intelligence (AI) Tech Shares Attractive

From a macro perspective, despite signs of a slowdown in the US economy, its overall prospect remains stable. May's inflation data came in lower than expected, creating a favourable condition for the Fed to cut rate. The US maintains a leading position in the tech industry, while the widespread adoption of AI technology drives demand further. This prompts us to remain a bullish take towards US tech companies that are of strategic importance. The "Magnificent 7" tech giants posted considerably strong earnings growth. Supported by substantial cash flows, many are paying out dividends. AI is heralded as the fourth industrial revolution. With the ability to create original contents and ideas, generative AI technologies fuel substantial demand for high-end chips, software and data centres. This development presents ample investment opportunities across the AI supply chain.


Further Upside in Japanese Equities Supported by Positive Drivers

Buoyed by corporate governance reforms, monetary policy normalisation, rising asset prices, and higher  tax-free investment limits for the Japanese, BEA Union Investment remains constructive on certain Japanese stocks. Since the introduction of corporate reforms by the Tokyo Stock Exchange in 2022, many Japanese firms have declared share buybacks, higher dividends, and the removal of cross-shareholdings, moves that bolster stock valuations. With rising domestic and international financial activities, we see investment potentials in banks and financial shares. In March, the Bank of Japan ended its negative interest rate policy and phased out the yield curve control (YCC), followed by the June announcement of reducing the scale in long-term government bond purchases to further normalise monetary policy. After years of deflationary pressure, Japan's long wait for inflation has finally reached an end, fuelled by increase in wage and corporate capital expenditure. The prospect of Japan's rate normalisation and rate cuts in the US imply the US-Japan monetary policy divergence would gradually narrow, leading to possible volatility in the Japanese yen. This leads us to prefer domestic demand-oriented stocks which are less prone to currency fluctuations.


Focus on China's High-yielding Value Stocks

China's economy remains relatively stable. The country rolled out historic property support measures in May. While their effectiveness remains to be seen, BEA Union Investment believes the worst may have passed for China's real estate sector. Nevertheless, our teams will uphold a cautious stance on Chinese property stocks and will reassess the situation as policy outcomes become clearer. Meanwhile, the teams remain constructive on high-yielding Chinese value stocks with attractive valuations, such as banks and oil plays, with the latter also serving as a hedge against geopolitical risks. Furthermore, the evolving US-China relationship will remain a key factor driving the markets. Should geopolitical tensions heat up, there could be implications on industries such as auto, tech, AI and semiconductors.


India's Structural Growth Prospects Unaffected by Election Results

Following India's general election, Narendra Modi secured his third term as Prime Minister, but his Bharatiya Janata Party lost its absolute majority. Nonetheless, the election outcome has not diminished our confidence about India's prospects. The country's economy grew more than expected in the latest quarter, up 7.8% . Credit ratings agency Standard & Poor's lifted India's outlook to positive from stable, citing continued policy stability and substantial infrastructure investments being conducive to economic growth. Supported by the infrastructure investments, an expanding middle class and a growing working population, our team will continue to identify stocks well-positioned for structural growth potential.


Conclusion

Steady global economic growth, persistently declining inflation and stabilising monetary policies and financial markets are factors that drive capital markets. However, divergent world macroeconomic conditions and monetary policies, alongside geopolitical tensions imply while investment opportunities can be found, markets are not without undercurrent. Moreover, many stock markets have already accumulated considerable gains, highlighting the importance of prudent stock selection. We believe countries with structural growth potentials, as well as leading industries and high-yielding value stocks, offer the potential for relatively better returns and stable income.