2024 Market Outlook: Fundamentals Progress; Disciplined Pacing Equity and Bond Integration

Interest rates to plateau, equities outlook positive
US soft landing could be harder than expected; Asia's outlook relatively optimistic
Cyclical recovery to bolster South Korean, Taiwanese tech stocks; See structural growth in India and Indonesia
Asian High-Yield bonds look set to improve

2024 markets will steadily improve; Rate cuts bring opportunities in Asian stocks and High-Yield bonds

Capital markets will face numerous challenges in 2024, with geopolitical risks and the US election being some of them. Unquestionably, steady progress has been made across various major facets of the global markets: economy, inflation, monetary policy and financial market stability. But not all uncertainties have been removed and it may take until mid-2024 before investors can see further clarity. As a result, equities and bonds investing should be done in an orderly and diversified fashion. As consumer prices taper off, global central banks will likely shift their focus from battling inflation to stimulating growth. This will spur more investment opportunities in capital markets. BEA Union Investment believes interest rates are showing signs of plateauing, and it won’t be until around mid next year before a trend will likely be formed. For now, Investment-Grade bonds can continue to play a core role in the asset allocation. Given the Fed's indication for three rate cuts next year, we believe in early positioning for equities.

US fiscal spending and personal savings rate continue to slide. In addition, the US service PMI has been hovering at 50 versus the historical average of 55. Should these trends persist, we would not rule out a harder than a soft landing for the US. BEA Union Investment believes it could take the Fed until mid-2024 before cutting rates to prop up the economy. By then, bank term deposits may decline accordingly. Our investment teams believe once rates begin to fall, the US dollar could come under pressure, which could provide a fillip to Asian equities. Markets with structural growth potential such as Indonesia and India, as well as South Korean and Taiwanese tech stocks driven by cyclical recovery could be most benefited. Lower US rates will also bode well for rates-sensitive High-Yield bonds, which should close the performance gap between Investment-Grade bonds and High-Yield bonds, given the latter should see improvements in their credit quality. Early next year, South Korean and select Chinese Investment-Grade bonds will continue to shine. Once the Fed starts shifting gears, our teams are optimistic towards the outlook of High-Yield bonds, including Macau gaming and Indian renewable names.

South Korea and Taiwan to benefit most from Asian's tech cyclical rebound

Buoyed by the cyclical recovery in smartphone and personal computers, our investment teams remain constructive on South Korean and Taiwanese equities, particularly semiconductors. Economic slowdown has sapped consumer sentiment in 2023, resulting in a build-up of inventories. But recent corporate results showed signs that the situation might be improving. Our teams expect the cycle is bottoming out and is bound for a recovery since the cycle for replacement upgrades is about to begin. In addition, the release of Windows 11 could encourage corporates and consumers to upgrade their systems. Upstream supply chain operators such as semiconductor manufacturers or semiconductor equipment suppliers could be major beneficiaries, in our view, since these companies enjoy structural growth and are of higher strategic value.

Indonesia and India are attractive for structural growth potentials

As at the end of September, India posted a stronger-than-expected year-on-year quarterly growth of 7.6%, driven by robust manufacturing activities and improving consumer sentiment. In addition, buoyed by the prospect of rising spending by the Indian government ahead of the country's 2024 election, Sensex and Nifty 50 -- the two major Indian benchmarks, repeatedly hit new highs. Equally enjoying sound fundamentals is Indonesia, which saw third-quarter GDP grew 4.9% as at end-September. The growth was solid yet there were signs of easing, which were partly contributed by softening commodities prices and falling exports. But markets expect the economy and market sentiment to receive a boost from increasing welfare budget and higher spending ahead of the country's 2024 election.

China's economy and Japan's monetary policy in focus

Whether Japan has emerged from deflation and its stance on the country's monetary policy will be under scrutiny. Investors will also closely monitor the pace of China's economic and property recovery as well as the potential release of further stimulus support.

From the beginning of 2023 through end-November, Japan's TOPIX rose more than 25%. Our investment teams expect Japan's capital markets will continue to take centre stage. The country's wage growth persists while October's inflation rate of 3.3% came in higher than the central bank's target, fuelling hopes that Japan may finally be coming out of deflationary pressure. As such, our investment teams believe Japan has room to adjust its yield curve control next year, bringing an end to its ultra-loose monetary policy in a gradual manner. This would inevitably affect the yen and Japanese equities, but mild inflation could simultaneously improve profitability and margins. It is also worth noting that Japan introduced its corporate reform in early 2023, stipulating listed companies with shares trading below book values to submit proposals pertaining to solutions of how they can improve capital efficiencies and return on equities. For the time being, about half of Japan's corporations are trading below book value. If the reform indeed makes good progress, we believe the rerating of Japanese equities could be in the cards. This will undoubtedly provide a boost to investor sentiment.

China will also be closely watched. Our teams believe a bigger push is needed to significantly drive economic growth next year. But considering the need for the authorities to strike a delicate balance between economic growth, social stability and political relations, the chance of rolling out large-scale stimulus seems unlikely. We believe the Chinese economy and its property market are undergoing structural transformations that could be lengthy and slow, and will require patience from investors. Still, our investment teams believe opportunities can be found in the Chinese market, such as value stocks. Some state-owned enterprises are trading at very attractive P/E ratios after the correction in 2023. These include companies in the oil and gas, banking and telecoms sectors that are trading at single-digit P/E ratios.

In summary, we expect conditions should be ripe for rates to reverse course by mid-2024, rekindling appetite for risk assets. No single asset would stand out next year, but growth in Asia, emerging markets in particular, will likely outshine that of Europe and the US. As such, flexible positioning across Asia-focused equities and bonds should be the direction.

Read More: 2024 Asian Bond Markets Outlook