Q4 Outlook: Opportunities Disperse Across Equities as Global Economies Diverge

Investors could gradually regain risk appetite for equities
Favour US growth stocks; See potentials in Chinese and Asian value stocks
Peaking US rates to benefit Asian Investment Grade Bonds

World economies and monetary policies are diverging, but there are nascent signs of economic growth stabilisation. BEA Union Investment believes a gradual risk-on towards equities is possible. From an asset allocation perspective, BEA Union Investment favours equities, with a bias towards US growth equities. Asian and Chinese value stocks are relatively appealing.

US macro data continues to surprise the market on the upside: a resilient job market, stable corporate earnings and GDP growth. All signs are pointing towards a soft landing for the US economy. Headline inflation held steady, rising 3.7% in September from the previous year. Stripping out food and energy prices, US core CPI recorded an annual growth of 4.1%, easing from August. The jobless rate remained stable in September, but added 336,000 new jobs, sharply exceeding market expectations. BEA Union Investment believes the US economy is heading for a soft landing. In the face of elevated rates for an extended period, rates may only reverse course in the second quarter or second half of 2024.

Turning to Asia, Japan's second-quarter GDP growth was revised downwards to 4.8%, but the broader economy still expanded compared to the pre-pandemic era. China's recovery remains uninspiring, but the latest data prints, such as retail sales, came in stronger than expected. BEA Union Investment believes that to propel growth, the authorities will continue to adopt an accommodative monetary stance in the foreseeable future. In terms of other Asian emerging markets, the economic fundamentals of many countries have so far remained robust, facing milder inflationary pressure than that of the West, allowing central banks to put an end to their rate hike cycles. Among them, India's structural growth continues to stand out, with the country persistently delivering market-beating macro data.

Favour US equities on economic resilience; Japanese earnings upgrade will support equities

Our investment teams favour developed market equities. The US' overall economy is surprisingly resilient. US retail sales rose 0.7% in September from the previous month, surpassing market expectations. In addition, its leading edge and growth in Artificial Intelligence (AI) and technology will continue to attract liquidity inflow, which could improve corporate profitability.

Japanese equities are also in favour. The Japanese stock market attracted continuous inflows driven by the earlier announcement of the country's corporate governance reform. Tokyo's new regulations could subsequently push up earnings estimates. Recently, corporates have also been delivering stable, market-meeting earnings results. Japan, which has been battered by deflation for 25 years, is welcoming inflation with open arms. Albeit inflationary pressure started easing recently, investors remain optimistic towards the overall trajectory. But Japan is not expecting to see any changes to its monetary policies any time soon because the economic report released in August showed the country has not completely shaken off deflation.

Among Asian emerging markets, our investment teams remain constructive towards India. The Asian Development Bank projected India's GDP to grow 6.3% this fiscal year and 6.7% next year. The country's economy grew 7.8% between April and June, while September manufacturing PMI remained in expansion mode. Corporates have also been handing out solid earnings reports, while the Nifty 50 repeatedly hit new highs in mid-September. Our investment teams believe India's long-term structural growth remains intact.

China's macro data were mixed, but showed signs of stabilising. China's imports and exports declined less than expected in September, the smallest decline in the past five months. The drop in the producer price index also narrowed. September retail sales beat market estimates, jumping 5.5% year on year. As we remain cautious about the country's economic development, our investment teams will continue to adopt a balanced investment approach, selecting value stocks that are trading at reasonable valuations with high dividend yields.

Peaking US rates bode well for Asian Investment Grade Bonds

Of late, the 10-year US treasury yield breached the 5% mark, triggering market risk aversion. Although the 10-year treasury yield broke its 16-year high level, we believe room for further significant increase could be limited. As global economies and monetary policies diverge, bond investment opportunities disperse accordingly. Supported by peaking US rates expectations, Asian Investment Grade bonds are investment worthy. Our top picks include South Korean financials, which have robust credit fundamentals, as well as BBB-rated Chinese technology, media and telecommunications (TMT) that have wider credit spreads. In addition, select High Yield Bonds with solid fundamentals are also on our radar. These include issuers from India's renewable and Macau's gaming sectors.

Favour South Korean banks and Chinese TMT Investment Grade Bonds

Asian Investment Grade Bonds offer attractive yields, and their issuers have steady credit fundamentals. Our investment teams favour the financial sector in particular, with South Korea being our top pick. We focus on A or BBB-rated bonds issued by banks, securities and credit card companies. Since the supply of South Korea's USD-denominated Investment Grade Bonds is higher than that of other Asian markets, valuations are more reasonable. The credit fundamentals of these issuers are considerably robust. That, coupled with well-positioned balance sheets, will allow the issuers to better weather domestic and external economic headwinds. At the same time, Japanese banks, as well as Hong Kong blue-chip banks and property bonds are also appealing.

China's data prints show mixed signals for its economy but have signs of stabilising. We continue to explore investment opportunities, such as BBB-rated TMT papers. At the end of August, major Chinese internet giants released earnings, with the majority of them meeting expectations. Taking cues from Premier Li Qiang's meeting with leading tech companies in July, investors believe the heavy-handed crackdown on China's tech sector has largely come to an end. We believe the authorities are willing to relax financing activities of the sector, which will benefit the development of the tech industry, and subsequently lend support to the bond market.

The prospects for Macau's gaming High Yield bonds look rosy, as the sector has been welcoming a spate of positive developments. Macau's gross gaming revenue is steadily recovering, and the momentum will likely extend into the fourth quarter, boosting the profitability of gaming operators and strengthening their balance sheets. In the latest earnings season, most operators handed out corporate results that matched or exceeded market expectations. Our investment teams are optimistic towards the sector.