Possibility of hard landing decreases, US interest rate cut expected in 2H

Heng An Standard Life (Asia) Limited ("HASL Asia" or "the Company") has released its Q2 2024 economic outlook, projecting resilient but slow global economic growth with a reduced likelihood of a hard landing. Overall inflation is decreasing but remains sticky, and HASL Asia expects the US to postpone its interest rate cut until the second half of this year. Given the limited room for significant interest rate hikes, the current yield levels of interest-rate bonds present attractive investment opportunities.

According to the latest World Economic Outlook from the International Monetary Fund (IMF), global economic growth is projected to remain at 3.1% this year and slightly increase to 3.2% in 2025. The upward revision of 0.2 percentage points in the economic growth forecast for 2024, compared to the last estimation, reflects the lagged impact of stronger-than-expected data from the US economy in 2023. The projected global economic growth rate for 2024, however, remains below the average annual growth rate of 3.8% between 2000 and 2019.

The state of the global supply chain has improved, and both overall and core inflation have decreased to levels close to those before the pandemic. Around 80% of the countries will experience year-on-year decrease in overall inflation and core inflation rates in 2024. Harriet Zhang, Chief Investment Officer of HASL Asia, believes that inflation data still exhibits stickiness in the short term, especially for inflation figures in the US, which generally exceed expectations. In the context of an anticipated soft landing of the economy, the US core inflation rate in February unexpectedly climbed 0.4% month on month, and the producer price index (PPI) in February recorded its largest increase in six months, indicating a challenging path for the Federal Reserve in combating inflation. As a result of this fresh data, market expectations of an immediate interest rate cut have further receded, with the first cut now expected in the second half of this year.

“For the China market, in line with expectations, economic growth targets and policy stance during the Two Sessions are consistent. Industry policies warrant attention. The anticipated fiscal policies, such as a fiscal deficit rate of 3% and the issuance of ultra-long-term special government bonds, are within expectations. New productive forces, such as new energy, new materials, advanced manufacturing, and electronic information, which are strategic emerging industries, should be given significant attention,” Zhang said.

Short-term improvements have been recorded in China’s economic data. The economic growth at the beginning of this year was driven by strong industrial value-added and investments. The recovery in consumption continues. Industrial value-added and fixed asset investments for January and February both exceeded market expectations. The year-on-year export growth rate for January and February accelerated, driven by strong growth in exports to BRICS countries, surpassing overall expectations. But in terms of financial data, indicators such as the balance of RMB loans and the growth rate of the social financing stock remain at low levels. Economic data for the next 1-2 months may shed more light.

Japan implemented an interest rate hike in March as scheduled, but indicated that monetary policy will remain accommodative. The Japanese Trade Union Confederation, the country’s largest labour union organisation, announced that the annual wage increase reached 5.28% in 2024, significantly higher than the 3.8% recorded last year and the largest increase in over 30 years. Subsequently, the Bank of Japan ended negative interest rates and raised the benchmark interest rate from -0.1% to 0% to 0.1%. But it is still a considerable distance from achieving the 2% inflation target.

Zhang said, “In terms of asset allocation, HASL Asia maintains a neutral rating on the US and China stock markets. The risk premium of US stocks has declined, and there is a higher possibility of short-term index volatility. As for A-shares and Hong Kong stocks, their valuations have experienced some correction, and their trends still depend on improvements in fiscal and monetary policies and economic expectations. The company maintains a neutral-optimistic rating on interest-rate bonds and credit bonds. Considering the limited room for significant interest rate hikes, the current yield levels present attractive investment opportunities. Currently, credit bonds have attractive yields, as interest rates are high and credit spreads have widened. After thoroughly assessing credit risks, investors can hold bonds for stable coupon income or take advantage of trading opportunities arising from interest rate fluctuations.”