Enhanced stock valuations and continued decline in US bond yields expected

Heng An Standard Life (Asia) Limited ("HASL Asia" or "the Company") has issued its Q1 2024 economic outlook, forecasting a higher likelihood of a soft landing and an end to the interest rate hike cycle. The company maintains a neutral stance on US and Chinese stocks, and a neutral-positive view on credit bonds and interest rate bonds.

Based on the Federal Reserve’s latest projections, the real GDP is expected to grow by 1.4% in 2024, lower than the 2.6% growth in 2023. Despite this, employment and consumption continue to show resilience. The December “dot plot” released by the Fed also suggests that interest rates are expected to undergo three cuts in 2024, one more than what was predicted in September 2023.

Harriet Zhang, Chief Investment Officer of HASL Asia, said: “Given the absence of compelling evidence suggesting an imminent and substantial decline in the economy over the next few months, along with the persistent inflation that has yet to recede to its long-term average levels, it is worth considering the potential impact on inflation before implementing early interest rate cuts. Consequently, underlying factors do not favour interest rate cuts in March 2024.”

In Mainland China, the economy has been stagnant since November 2023, raising concerns among investors regarding weak domestic demand. In trade, China experienced a slight improvement in November, with exports in US dollar terms increasing 0.5% year on year. Imports, however, were a disappointment, falling 0.6%, much short of market expectations. The consumer price index (CPI) in November fell 0.5% year on year, its third decline in the past year and reaching a new low since November 2020. The producer price index (PPI) also declined 3% year on year, declining 0.4 percentage point more compared to the previous period.

“Looking ahead to 2024, there are expectations of increased fiscal policy measures in Mainland China to further optimise the economic structure. Moreover, there is still potential for additional countercyclical adjustment policies, which can boost market risk appetite and confidence. The Central Economic Work Conference has emphasised the importance of laying a solid foundation before seeking breakthroughs, with particular focus on expanding domestic demand. The Ministry of Finance recently expressed its intention to study fiscal and taxation policies that encourage and guide consumer spending, specifically targeting to increase household consumption. Efforts will be directed towards increasing consumption capacity, improving the consumption environment, and nurturing emerging consumption patterns.” Harriet said.

In terms of asset allocation, both US and Chinese stocks are currently rated as neutral. The substantial decrease in the yield of the 10-year US Treasury bond since November 2023 has raised the value of US and Hong Kong stocks, potentially leading to a shift towards a balanced allocation in the market. A-shares and Hong Kong stocks are currently undervalued, and the progress of China’s economic recovery post-pandemic remains the key factor influencing market performance, with scope for the pessimistic sentiment lifting. If risk factors ease subsequently, stock ratings may be upgraded to a neutral-optimistic level.

The company maintains a neutral-optimistic rating on credit bonds and interest rate bonds. Currently, the yield on credit bonds is quite attractive. For trading purposes, one can consider short to medium-term bonds and make use of the opportunities arising from interest rate fluctuations after a thorough assessment of credit risks. In the backdrop of a slowdown in US economic growth and inflation easing in 2024, the overall trend for interest rate bonds is downward. If employment and other economic pressures continue to rise, the Federal Reserve is expected to begin cutting interest rates, leading to further declines in US bond yields. As for exchange rates, Japan, which has been implementing a negative interest rate policy, is expected to end negative rates in April this year and initiate rate hikes, potentially causing the Japanese yen to fluctuate and appreciate in the first quarter.