Market Outlook - January 2025

In our previous update, we briefly shared our outlook for 2025, and we maintain our view that market risks will be driven by three key factors: the uncertain interest rate trajectory in the US, elevated US equity valuations in the sectors that we monitor and heightened geopolitical risks globally. These factors are likely to result in higher volatility in equity markets compared to recent years. However, this does not mean that equity prices will drop precipitously. Instead, we simply believe a more cautious approach to positioning and stock picking is warranted.

The US equity market has benefited from the strength in its economy and leading position in artificial intelligence (“AI”) technologies. This has led to high earnings expectations being baked into stock valuations, which we find to be optimistic given the looming risk of tariffs and the ongoing cooling of the general economy. Some argue that the Trump administration will reduce corporate taxes to boost earnings and control interest rates despite inflation risks. Our view is that timing all these initiatives to benefit the US economy will be challenging and there will likely be knee-jerk reactions to any significant policy announcements, earnings misses and economic data surprises.

For ASEAN countries, while the “China + 1” narrative is beneficial, they may not be spared from US tariffs as Trump announced his attention to impose tariffs on close allies such as the EU and Canada. Additionally, recent US technology export regulations were tightened, and none of the ASEAN countries were included in the list of “US allies” who were granted unrestricted access to advanced semiconductors.

In other developed markets such as major EU countries and Japan, we believe that their economies are still struggling to pick-up meaningfully. Coupled with the ongoing geopolitical environment, we will continue to be selective in increasing exposure to these regions.

Among the countries we monitor, we believe that China could be a bright spot in 2025, provided the administration acts strongly and decisively. They have announced ambitious goals to stimulate the economy with no concrete actions yet, in our view. We will be monitoring their key policy meetings for actionable plans before significantly increasing our weighting in the region.

Market Outlook - December 2024

Recently, China has expressed increasing urgency to stabilise its property market and domestic consumption, through stronger-than-usual language from the administration. Given that these were mostly high-level statements, we remain skeptical on the announcement given the Chinese government’s hesitance to implement substantial economic stimulus in recent years.

In the US, we also see that there has been growing interest in value stocks, as investors seek opportunities in undervalued companies amid concentrated gains in companies like the Magnificent Seven. At current valuations, Goldman Sachs has forecasted that the broader  S&P500 index will return a mere 3% annually over the next 10 years. We will however remain focused and selective on US opportunities - buying on dips, looking at undervalued stocks or even going into smaller capitalization companies if they have differentiated business models or products. We believe this approach is more sensible under the current conditions of uncertainty in both the global economy and geopolitics heading into 2025.

Market Outlook - November 2024

The Chinese administration have announced their intention to rollout an additional RMB 6 trillion package to support the debt burden of local governments and China’s finance minister also gave forward guidance that they would be introducing new measures to further stabilise the property market. While the headline number of RMB 6 trillion seems substantial, ultimately it was not impressive as the debt swap is intended to occur gradually over the next 3 years. Furthermore, there is uncertainty over how the local governments will spur their respective economies once their debt position improves. A positive note is that there has been some initial rebound in property sales. However, we believe near-term equity valuations in China are likely to remain rangebound until further stimulus measures are announced given the modest earnings results so far.

In the US, the presidential election results was a red sweep, where the Republican party took control of the House and Senate. This shift is expected to lead to more decisive policy action going forward which would be beneficial for domestic US companies. Nevertheless, President Donald Trump’s erratic nature may cause bouts of market volatility despite the anticipated policy clarity.

Going forward into 2025, we remain constructive on technology companies. With overall valuation levels in this space remaining high and economic growth still normalising, we shall selectively initiate new positions. We note that equity markets have been exhibiting high amounts of volatility on surprising economic data or slight earnings misses. We believe this is due to the high valuations observed in the broad equity market. Though disappointing earnings results may signal the start of a deterioration in business performance, we tend to see that most of these reactions are overblown over a long-term horizon. This presenting attractive buying opportunities.

Market Outlook - October 2024

Since the initial surge in the Hong Kong and Chinese stock market, significant profit taking has followed. Despite this, we maintain our view that company valuations in the region remains attractive. The main event that we are monitoring is towards the end of this month, where China holds their Politburo Standing Committee. We expect major stimulus measures to be announced given the state of their economy, and this should result in a positive impact to stock valuations. In the absence of strong stimulus measures, we will be reassessing our view on the region.

We remain confident that investments in artificial intelligence (“AI”) applications will remain strong through 2025, driven by the industry's continued high-growth potential. While sales momentum has moderated, we believe this cycle has several more quarters of growth ahead. As a result, we believe that modest selloffs in the US technology sector are potentially attractive entry points.

Market Outlook - September 2024

Since the last newsletter, technology stocks continued to underperform as investors began to question the premium valuations that these companies command since the start of the artificial intelligence (“AI”) narrative. There is no doubt that AI will result in long-term productivity gains as more companies begin to announce standalone AI products. Additionally, continued improvements in AI hardware will likely accelerate development going forward.

As we assess the current investment landscape, we anticipate the road forward for AI-related opportunities to be less smooth than the past year as investors increasingly scrutinise the potential for these AI investments and applications to deliver solid returns.

We believe that the first to see widespread AI adoption would be in areas that provide support in pattern recognition and personal assistance. These applications, while not entirely new, have progressed significantly over the past year. To illustrate, Salesforce has recently announced Agentforce, a client servicing bot that is easily customisable for different industry applications. Compared to older chatbots, early adopters of Agentforce have seen a 40% improvement in customer query resolution. In healthcare, doctors are also increasingly using AI to assist with effective diagnosis and drug development. We are well positioned to benefit from increasing AI adoption over the long-term on this front.

Where we are looking to gain additional exposure is in AI-related hardware. We are tracking several data center equipment and power management companies. However, these sectors in general are trading at a high premium and are already well-invested. We believe we should take a more considered approach prior to initiating a significant position given the high valuations.

The AI landscape is undoubtedly changing very quickly, and we will be flexible on our positions depending on the developments that unfold going forward.

Market Outlook - August 2024

Early in August, equity markets experienced a sudden spike in volatility, where volatility reached levels unseen since the COVID-19 crash. This was caused by a significant unwinding of the Yen carry trade. The unwinding was triggered after the Bank of Japan (“BOJ”) unexpectedly raised interest rates, where a sharp appreciation in the Japanese Yen followed. Traders who borrowed Yen cheaply then had to sell off their investments to pay back their borrowings. The situation worsened when weaker-than-expected US employment data caused the greenback to depreciate further against the Yen. Shortly after the sharp market decline, the BOJ has given comfort to the public that they will not hike interest rates further while financial markets are unstable. Thus, we are of the opinion that as of now, the carry trade should not cause further volatility.

We are cautiously optimistic about the market consolidation. The reason for the caution is due to the still high valuation of the broad US equity market despite increasingly slowing fundamentals and economic data. We will continue to watch near-term trends given that a broad recovery in equity markets normally results in bullish short-term sentiment.

Market Outlook - July 2024

China’s economy continues to be supported by their manufacturing industry, while consumer spending remains tepid. Growth in retail sales continue to disappoint, and their recent Q2 Growth Domestic Product (“GDP”) reading saw a deceleration in growth, posting just 4.7% growth year-on-year. In the property sector, there are positive signs that the homebuying easing measures have supported property sales as secondary property sales in tier-one cities jumped double digits. While we are encouraged by this early data point, we need more evidence to be convinced given that we have observed a short-lived rise in home sales when homebuying restrictions was eased significantly in 2023. Additionally, we will also be monitoring the outcome of the Third Plenum to understand the broad policies shaping the Chinese economy going forward.

While we maintain our modest concerns over the medium-term outlook on the US economy, the deceleration in growth and unemployment trends have yet to catch the attention of investors due to strong AI-related investments. Over the longer-term, we are assured that fiscal dominance will be prevalent as the US’ Congressional Budget Office projects that debt-to-GDP levels will increase from around 120% today to 200% over the next 30 years. This frequently raises concerns on the sustainability of the US economy. Our take is that the current status quo could last much longer than anticipated. Moreover, aggressive attempts to time market peaks normally results in large opportunity costs. Hence, we will continue to invest in US firms while being cognizant of potential de-dollarization and debt risks over the long run.

Following the Fed's testimony on their readiness to lower interest rates and market expectations of a Donald Trump victory in the presidential election, there has been a sudden rotation into smaller capitalization stocks, which have underperformed the Standard & Poor’s 500 since COVID heavily affected these businesses. The market is likely anticipating a “no landing” scenario, as small businesses typically benefit more from lower borrowing costs and fiscal spending compared to larger firms. We remain wary of smaller firms that are significantly exposed to debt due to our concerns about slowing end-demand globally.

Market Outlook - June 2024

Equity markets have continued to reach new highs, driven largely by the outperformance of semiconductor stocks. We believe that such concentrated market movements warrants some caution as it implies that investors do not have confidence in the broad economy.

The US Federal Reserve has also largely withheld any conviction on interest rate cuts in the near-term, citing robust employment and sticky inflation. Market analysts thus far have also displaced any possibility of a recession as businesses and consumers appear to stay resilient. On the other hand, there are signs showing that US unemployment is gradually rising with the unemployment rate reaching 4%, from a low of 3.4% in 2023. As the economy continues to weaken gradually, we are aligned with expectations that one interest rate cut is likely on the table this year.

China’s market performance has started to lag after the government’s policy announcements to stabilize their property market. Some profit taking is expected, given the sharp upward momentum, in our view. Market participants are likely waiting for further updates to be announced on the property industry before having conviction that the slowdown is under control. We uphold the view that the property industry will not result in a systemic risk, given the government’s focus on the issue.

In the technology sector, we are optimistic on the long-term productivity gains from AI applications. One study found that software developers using Microsoft’s GitHub CoPilot, their AI assistant, completed coding tasks up to 56% faster than those not using the tool. Expectations on AI applications are highly optimistic, with investment in hyperscalers expected to grow at least 20% per year up to 2030. While automating tasks such as summarising emails, customer service and image generation would see cost savings, we believe that AI will have to evolve to artificial general intelligence for it to see major contributions to the economy. Generative AI has made significant improvements in recent times, but it lacks the ability to adapt when queries falls outside of its training data. Advancements in general intelligence should mitigate this limitation, paving the way to a more versatile AI solution. Moreover, end-consumer use still seems lacking as current mobile hardware is too slow to process AI tasks efficiently. However, with massive AI investment persisting, there are already significant improvements occurring and we shall continue to look for opportunities as companies innovate and monetise AI features.

Market Outlook - May 2024

As of now, global equity market prices have already recovered from April’s decline on the back of cooling US economic data and significant share buyback programs being announced. We expect this erratic market behaviour to continue until the timing of interest rate cuts becomes certain as investors eagerly price in any possibility of monetary easing. Additionally, with US elections closing in, there will likely be additional volatility in the coming months due to uncertainty on government policy adoption.

China has taken more direct actions to restore confidence in their property sector. These included complete removal on home-buying restrictions in Xi’an, Hangzhou and Chengdu and further relaxation of property buying measures in other major cities. More significantly, the administration has setup an initial 300 billion RMB facility for local governments to acquire excess property inventory and develop them into affordable housing. This would further alleviate liquidity stress on property developers. These actions were greatly supported by market participants as shown by major inflows and sharp price appreciations in their equity markets. The facility is encouraging and will likely need to be expanded for it to have a meaningful impact on the broad property sector. If expanded significantly, we believe that property prices should form a bottom and subsequently, consumer confidence should return. On top of that, the Chinese government has targeted large scale equipment renewals and trade-ins of durable consumer goods to boost private consumption growth, and this could spread over several years. Other monetary policy easing including removing the floor on mortgage rates and lowering of downpayment rates have been announced.

With Q1 earnings season coming to a close, we observe a mixed outcome for large US firms. Many consumer discretionary firms continue to report further slowdowns in spending and an increasingly selective consumer. Consumer companies with international exposure tended to comment on a slower-than-expected recovery from Chinese consumers. On the other hand, major US technology firms maintained growth, with some showcasing rising growth owing to AI adoption. China paints a similar story where technology firms showcase growth, while consumer spending was lukewarm in most segments. The difference is that China’s consumer spending has been on an upward trajectory while US is the converse.

With major economies at potential turning points, we are aiming to be selective within US and China given our current exposures. Despite the weak economic data in Japan, we remain positive on the corporate governance restructuring process as it would benefit shareholder returns over the long-term.

Market Outlook - April 2024

Recently, both bond and stock markets saw increased volatility. This shift came as inflation and retail sales in the US outpaced expectations repeatedly. Meanwhile, the Fed again announced their decision to wait for more data before lowering interest rates. As a result, investors aggressively readjusted their interest rate forecasts, which directly impacted equity markets. We believe the concerns are warranted as commodity prices have soared as of late, which could cause higher inflation in the coming months. At this point in time, our assessment suggests that the equity price movements may be a short-term reaction to bond yields and we will monitor these trends attentively.

China’s program to support “whitelist” property projects has raised RMB 469 billion as at end-March. This is a notable increase over the RMB 200 billion previously reported and we hope to see substantially more funds disbursed given the size of China’s residential property sector. There are also expectations that the People’s Bank of China will be enriching its monetary toolbox by gradually increasing the trading of government bonds in its open market operations.  To us, this is a form of monetary policy easing, another positive step instituted. We also hold a positive outlook on China's recent Q1 GDP growth and the expansion in PMI numbers. However, we acknowledge an initial slowdown in growth for key economic indicators, such as retail sales and industrial production, indicating persistent sluggishness in the domestic economy. We will continue tracking these developments in the coming months to confirm the trend.

Additionally, we are monitoring the escalating geopolitical tensions between Iran and Israel, particularly as Israel contemplates its response to Iran's recent drone strikes on Israeli territory. This situation has the potential to significantly impact crude oil prices, adding risk to higher inflation in the near-term.  The US-China tension continues to be a long-term issue. It was reported that the US lawmakers have introduced a bill to bar US mutual funds from investing in indices that track Chinese stocks. We note that global portfolio allocation to the Chinese market has already been reduced since last year. We believe this has already resulted in the US market valuation premium to the Chinese market at an extremely high level versus historical trends. We believe that once the Chinese economy is on a firmer and sustainable growth footing, the valuation premium should contract.

Over the near-term, inflationary risks in the US and uncertainty in China may cause headwinds to equity markets. As stated above, our analysis on prevailing data suggests that this is a temporary correction given heightened valuations in developed equity markets. As such, we will look for attractive opportunities going forward.

Market Outlook - March 2024

Throughout the month, the Fed reiterated that there is no urgency for interest rate cuts during the first half of 2024. Furthermore, they specifically addressed risks within the commercial real estate sector, acknowledging that while the situation is currently manageable, it will lead to more banking failures. This aligns with our cautious perspective regarding the potential consequences of policy mistakes if interest rates are kept elevated for an extended period.

China has initiated action to support “whitelist” projects announced previously, with major commercial banks approving over RMB 200 billion in loans to help finance the completion of these projects. We view this as a positive first step, but additional financing will likely be needed to ensure sufficient liquidity to complete these projects. As such, we will monitor for further announcements on this topic, as well as its impact on property sales and prices.

The recent Two Sessions convened by the Chinese Communist Party saw similar 2024 economic targets set as last year. The 5.0% growth domestic product (“GDP”) growth target set for 2024 seems ambitious given the modest deficit target of 3.0% and a consumer base that is focused on saving. However, we believe the GDP target may be attainable, as we are observing gradual shifts in consumers’ behaviour where they are increasingly more inclined towards spending, and we also note that growth outside of the real estate sector remains robust.

Following a review of the latest earnings reports from leading corporations worldwide, we've noted predominantly robust earnings growth for 4Q23, with some companies projecting modest top-line expansion for 2024. However, US stocks that missed results and guidance expectations fell sharply given their mostly elevated valuations. With the outlook becoming increasingly uncertain, we will monitor closely for any signs from both economic and industry data to decide the next portfolio move. Regardless, we remain positive on the long-term outlook of our holdings.

Market Outlook - February 2024

As we enter 2024, expectations of an early interest rate cuts by the Fed and the European Central Bank continue to fade as both central banks downplayed the odds of a cut soon. For the US, this is due to the robust economic data that was released so far. Continued expansion in the US economy suggests that the FED needs to move carefully to not lower rate too soon or risk inflation creeping back up. FED has to also consider the weakening growth in some parts of the economy which may lead to broad-based slowdown. This is a tricky and delicate balancing act for the US FED and could entail policy mistakes in the near term for the US economy and as a corollary, the financial markets if not done correctly. This is in-line with our initial thinking. For the Eurozone, inflation remains sticky on the back of still-high energy price, amongst others.

In China, after the monetary policy easing announcement, the Chinese government followed that up by lowering the 5-year loan prime rate by 25 basis points to 3.95%. Under the property project “whitelist” initiative, commercial banks are encouraged to provide lending to the “whitelists” made by the local governments. These rapid moves recently are a signal that the government is determined to front-load stimulus measures to prevent the weak sentiment in the housing market from spiraling downwards. We believe that these support policies would be progressive to ensure that real estate market recovers on a sustainable trajectory.

We are also seeing initial positive datapoints domestically from the Monetary Aggregate numbers and improvements in domestic travel and spending during the Lunar New Year period. On the external front, China is experiencing export growth for the second consecutive month in December 2023. We expect continued improvement in the overall economy for 2024.

All these moves came thick and fast as the State Council called for “forceful measures” to restore confidence in both the economy and financial market.

For Japan, we are encouraged by the strength of the economy and the market since last year. The corporate reforms in Japan which have been is talked about for years, is finally coming into fruition. The days of the deflationary period appears to be coming to an end. The tepid economic growth has broken out of its 30-year deflationary phase. We believe these reforms should lift corporates’ profit margins and shareholder returns and thus create ample room for further unlocking of value for shareholders.

In summary, we are optimistic on the Asian markets’ prospects, and cautious on the US market given the headwinds we would be facing, and the overcrowded investments in the US Technology sector to date.

Market Outlook - January 2024

After 3 years of rising global bond yields and with developed countries’ central banks largely done with interest rate hikes, the main theme for 2024 appears to be the expectation for easing of interest rates by the US Federal Reserve. We are of the view that the US and Europe will likely witness sharply slower economic activity and higher unemployment rates. Europe in particular, faces a much higher risk of a prolonged recession. On interest rate, we believe the US Federal Reserve will hold off interest rate reduction as long as possible. This is because shelter cost, a main component of inflation, continues to remain stubbornly high. Furthermore, shipping costs for goods should increase as there would be trade disruptions from rising geopolitical risks as the US and the UK carried out air strikes against the Houthi rebels in Yemen following Houthi attacks on commercial shipping the Red Sea.

Geopolitical tensions will be a key factor in our assessment of the global economy and financial market performances. In our opinion, the US-China tension is the long term, dominant factor in looking into the future state of the global economy and financial markets. Our initial take is that there is some form of business decoupling between both countries, especially in the Semiconductor industry. We see this as an investment opportunity as we believe there should be more innovation proliferating from this tension.

Last year, we saw the emergence of ChatGPT, a generative artificial intelligence (“AI”) which enables users to refine and steer a conversation towards a desired length, format, style, level of detail and language. This stirred a lot of interest in companies adopting AI in one form or another. Market participants are currently at the stage of estimating and gauging the eventual global addressable market. We have some AI companies in the portfolio currently and are excited about their long term growth potential of its applications. We also believe in the enormous opportunities of AI and are constantly on the lookout for these investment ideas. We shall highlight these ideas when we have added them to the portfolio in future.

The Chinese economy is recovering with the main drag coming from the real estate sector. However, it is showing signs of stabilizing after a series of monetary and fiscal policy support. To recap, the Central Economic Work Conference called for policy coherence and reiterated proactive fiscal expansion. Secondly, the next stage of the real estate policy is focusing on meeting developers’ financing needs. Thirdly, a new round of structural reforms on fiscal and tax system will be launched, and this would be unveiled during the Third Plenum this year. To us, these are incremental efforts by the Chinese government to shore up the economy. At the time of writing, the China’s central bank announced that the reserve requirement ratio for commercial banks will be reduced by 50 basis points from February 5. It has also reduced the relending and rediscount rate for bank loans designated for small firms and agricultural businesses by

25 basis points. These are positive moves in injecting much needed liquidity into the market, and we believe there could be more supportive measures to come in 2024. On balance, we are optimistic on the Chinese economy and the Chinese financial markets as the government looks to restore confidence.

This is a Presidential Election year for US and the outcome will have implications on how the US policymakers shape the market and economy. This is something we will not delve in greater detail as we do not really have sufficient insights to the domestic political challenges. We will only look at the economic and market directions as data evidence to guide our investment thinking. Our best guess is that the US economy is directionally looking inwards.

Market Outlook - December 2023

The equity market landscape remains unchanged since our last newsletter, where investors leaned towards developed markets. Although Asia Pacific markets also enjoyed positive returns, performance continued to trail behind despite noticeable improvements in economic data. We suspect that the fluctuations are mainly attributed to a tug-of-war between year-end tax-loss harvesting and window dressing by investment institutions. Historically, this short-term market volatility tends to persist into January as fund managers adjust their portfolios for reporting purposes.

Equity markets in major developed countries have experienced euphoria since the Fed decided to maintain interest rates for two meetings consecutively, signaling investor confidence that the interest rate cycle has finally peaked. At the same time, the long-anticipated recession scenario appears to be dissipating, with many economists now shifting their base case to a “soft-landing” scenario. Nonetheless, with inflation stubbornly staying above the Fed’s 2% inflation target, we believe that interest rates would continue to stay high. It is uncertain how the future economic landscape will emerge once US housing inflation has been dampened. We believe that the odds of a US recession is moderately high, but it should not culminate into a systemic event.

In the previous month, we briefly touched on the visit of China’s president (Xi Jinping) to the US where we saw positive outcomes. Firstly, China directly announced their commitment to continue peaceful cooperation with the US. Resumption of military talks after many months of radio silence showed China’s willingness to restore political ties with the US.

Additionally, Xi’s dinner with US business leaders was also positive, showcasing clear support from large US corporations despite geopolitical tension, from our perspective. We believe that US corporations still have strong intentions to operate in China over the long-term given their massive population. One of the notable developments since the event was the joint venture between Mastercard and China’s national transaction processor, NetsUnion Clearing. This initiative would allow Mastercard cardholders to enjoy seamless payments in China.

Despite these positive announcements, we also need to see firm, reciprocal actions from the US administration for us to be confident that geopolitical risk has reduced substantially. Our base case as of now is that geopolitical risk will remain a threat throughout 2024 due to the US presidential elections occurring late next year. During this period, we believe that both US Congressional parties will continue to emphasise China as their largest national security threat to achieve popularity.

We will also be seeing many other national elections (notably Taiwan) taking place around the world, and this will have implications on how things will shape up in various forms of conflicts and competition between US and China. As national security takes center stage among leading nations, we anticipate a gradual transition in global supply chains and capital movement over the long-term. This shift would likely result in increased fragmentation, favoring firms capable of maintaining market share and efficiency over the “reshoring” process.

In China, the Central Economic Work Conference has just concluded with policymakers setting a pro-growth stance for 2024, calling for more efforts to support economic growth and revive confidence. Over the last few months, the government has announced various supportive measures, be it monetary, fiscal or administrative. These moves were progressive and we believe they are growing in intensity. We expect the government to roll out more plans in the near term to stimulate the economy and address risks in the real estate sector.

Considering all the above factors, we continue to believe that Asia would continue to be the bright spot for economic growth in the global economy. A lower interest rate environment should also alleviate the tight liquidity situation around the world and bring about less interest-servicing burden on companies and individuals.

Market Outlook - November 2023

Regarding the humanitarian crisis between Israel and Hamas, our central scenario is that the war should not extend into a wider regional conflict given the military presence of two US aircraft carriers near Israel. Thus, we believe the impact to our portfolio and to the global economy should be minimal.

US economic data continues to display resilience during the month, and we believe there are two main contributors to this. Firstly, despite the Fed's tightening efforts since 2022, the US financial system maintains robust liquidity, prolonged by the impact of the massive COVID-19 stimulus, in our view. Secondly, extensive fiscal spending by the US government has offset the Fed's tightening measures. From our assessment, the US should still experience a decline in economic activity over the medium-term as we see liquidity tapering. Current economic forecasts for US GDP qoq growth is 0.7% for 4Q23 and 0.3% for 1Q24, signifying that the US should slowdown in the coming quarters.

China's recovery has gained notable momentum in recent months, evident in the upward trend in imports, retail sales and industrial output. Additionally, a significant RMB 1 trillion stimulus from the issuance of sovereign debt was announced by the administration. Despite this positive trajectory, investor sentiment remains indiscriminate, leading to depressed valuations relative to the US. From our perspective, the US continues to benefit from positive sentiment, particularly with the “Magnificent 7” names, where the potential of artificial intelligence continues to be the key driver of asset prices. Our constant assessment indicates that the prolonged valuation gap between the US and China is unsustainable, and we believe that over the medium-term, the gap should narrow in favour of China.

Japan remains an intriguing prospect with inflation seemingly supported by underlying demand after grappling with deflation for years. In response to the weakening economic data, their government has also recently approved a US$ 110 billion stimulus package to support private consumption. We anticipate this to translate into economic growth over the near-to-medium term.

In conclusion, our primary focus remains in Asia, where our thesis is reinforced by the recent uptrend in China’s economic data. The geopolitical risk between US-China has also decreased since the Biden-Xi meeting in San Francisco, where there were several agreements between both countries.

Market Outlook - October 2023

After a month since China relaxed their housing restrictions, overall home sales continued to be weak as consumer confidence has yet to be restored meaningfully. We believe that homebuyers in China will remain hesitant until the industry is able to contain the liquidity issues faced by property developers. This is a challenging issue to tackle as continued low sales will further worsen developer’s cashflow position, which in turn will affect consumer confidence. The administration will likely arrest this situation by issuing liquidity for developers to complete their projects. Through government actions, we believe that they can bring the housing situation under control. Aside from the ongoing geopolitical tension between China and the US, we see the property crisis as the last hurdle for an overall recovery, given the broader improving economic data and earnings resilience from the leading firms that we cover. We are also encouraged by the Chinese government continuous support for the economy through increased spendings, hence bigger budget deficit and more domestic investments. We are beginning to see early signs of the Chinese economy stabilising.

In early September, Huawei surprised the world by launching their Mate 60 Pro smartphone which carried a 7nm processor. Previously, the speculated limit for the Mate 60’s mass production using China’s existing technology was at 14nm. It is a clear win that China has produced this breakthrough internally despite continued semiconductor sanctions from the US. However, it remains to be seen whether China has the capability to mass produce such chips across multiple applications and further develop smaller nodes without access to cutting edge machines. With the current geopolitical landscape, we maintain our view that the US-China rivalry will continue and possibly intensify over the long-term.

Retail sales in the US surprised in September, growing 3.7% yoy. This came at the cost of lower consumer savings, dropping to levels not seen since before the global financial crisis. We attribute the sudden economic pick-up to be due to pent-up demand over the summer holidays. Thus, we think that the current consumption growth is unsustainable over the long-term. We have also been monitoring the employment situation in the US, where we observe weakening employment in the higher value-added industries such as finance, professional services and information technology. Therefore, we are wary of the short-term recovery in economic data.

Our base case remains that the fundamental prospects remain brighter within Asia. While developed countries undergo a period of slowing growth, we believe that the effects are non-systemic and will not have a detrimental effect to the rest of the world.

Market Outlook - September 2023

Since the Politburo meeting in July, the Chinese administration has released a slew of measures in an attempt to boost their economy. The most significant measures were the lowered interest rates, reduced banking reserve requirement ratios and relaxed housing restrictions for homebuyers. On the monetary policy front, we believe the policies considered will likely be released gradually and in a calculated manner, thus it would take time to see a major impact to the economy. Nevertheless, we believe that the administration are headed in the right direction to support the economy.

In China’s property sector, we believe the relaxation of housing restrictions in China are significant for two main reasons. Firstly, the downpayment requirements have been reduced dramatically to 20% and 30% for first and second-time homebuyers respectively. Prior to the change, first-time homebuyers had to fork out around 30%-35% of the property value as downpayment and second-time homebuyers had to pay up to 70%. Secondly, the classification of “second-time homebuyers” has been relaxed, where single homeowners who sell their existing property to purchase a new unit will still be considered “first-time homebuyers”, rather than second-time homebuyers. As pointed out earlier, first-time homebuyers enjoy a lower downpayment, as well as having access to cheaper mortgage rates. This would make properties more affordable, while freeing up cash for consumers to spend elsewhere. Initial sales reaction was encouraging as property sales saw a triple-digit percentage rate of increase week-on-week after the relaxation. We will be monitoring incoming data over the following months to confirm the trend.

Economic data in the US consumer data continues to decelerate, where consumer-related firms report weakening discretionary spend. Headline retail sales figures in August appeared resilient but was actually boosted by higher fuel prices paid by consumers. We continue to believe that the underlying trend of decelerating discretionary spend will continue. The notable discretionary sub-sectors that have demonstrated continued resilience has been recreational and travel spend. The post-COVID reopening demand is still strong globally and marks a useful reference for China when consumer confidence and outbound travel returns to the country.

Addressing the US equity market, which have outperformed due to the technology sector. Although we remain cautious due to overextended valuations, we are cognizant that sentiment will remain high as long as analyst forecasts and quarterly company guidance remains optimistic. The semiconductor industry trend has also been positive, as bottoming signs were seen from global chip sales improving sequentially. Our belief is that these factors would continue to support the overall tech sector globally at least in the near-term.

Market Outlook - August 2023

The major occurrence in China in July was the annual Politburo meeting. The participants announced a few key measures (both fiscal and monetary), namely continued support to the property sector, boosting consumption and restoring youth employment. These announcements were encouraging given the focus on critical issues in the country, however there were only a few details released on how the administration plans to execute these measures. We believe that the government has the capacity to act in a forceful way given their low national debt to GDP levels relative to other developed nations.

In the US, consumer spending continues to weaken, albeit at a much slower rate than expected. We are closely watching the resumption of student loan repayments from October onwards as this could have an immediate impact on consumption. Having said that, the overall US economy may be supported by one-off infrastructure spending in the near-term as evidenced by the recent GDP reading, spurred by major acts announced in preceding years such as the Bipartisan Infrastructure Bill, CHIPS Act and Inflation Reduction Act.

In general, we are finally seeing the highly anticipated slowdown in business activity and consumption globally, showcased by continued and deepening declines in export growth at major manufacturing countries. Thus far, the downtrend is not alarming with economists expecting a turnaround within the next twelve months. During this timeframe, current analysis suggests that businesses should have fully exhausted their existing inventories that they piled up over COVID-19, and therefore will have renewed demand to purchase again. On the other hand, the waning economy is also expected to cause the Fed to loosen their tight monetary policy, thus freeing up further propensity to spend. We will be monitoring these trends closely as we may be reaching a turning point over the coming quarters. This includes how the US Department of Treasury plans to increase the issuance of long-dated US Treasuries in the 4Q 2023.

Corporate earnings across sectors continue to show mixed results as expected, however they are mostly encouraging as both consumer and corporate spending has been more resilient than we originally anticipated. The beneficiaries are companies with a strong competitive position where they showed reacceleration in sales and even stronger earnings growth after cost-cutting in 2022. On the other hand, leveraged companies that we monitor are beginning to see the effects of interest rate hikes in a significant way, resulting in heightened borrowing costs offsetting sales growth. Finally, there is increasing pressure from consumers globally for firms to offer more value-for-money products as the cost of living has risen meaningfully since the start of the COVID pandemic. All-in-all the results thus far have been largely in-line or above expectations. We continue to expect outperformance in China once the government has issued clear policies to support their economy, especially on the property sector.

Market Outlook - July 2023

Looking forward towards the end of this year, our base case is that major Western economies should underperform as shown by their declining PMI numbers and slowing growth in corporate earnings. The risk of recession remains high in this region, in our view. We believe that the current rally in AI-related stocks is largely due to sentiment rather than fundamentals as most AI services are still at an introductory stage without a sustainable business model. Having said that, we always had conviction in the long-term adoption of AI technology.

Over in China, depressed consumer sentiment continues to be a challenge for the country despite the gradual improvement seen in the economy. Quantifiable factors still point to the weak property market and high unemployment rate for young adults. There has been news from state newspapers that officials will roll-out policies to support the real estate market and may also consider introducing measures to boost business confidence. Additionally, the recent shake-up at the People’s Bank of China where a new central bank chief was appointed, signals that the government should soon take action to support their currency and economy, in our view.

In other parts of Asia, Japan is staging a broad economic recovery since reopening its economy as foreign demand returns to the country. We also see certain ASEAN countries, such as Vietnam, to be a beneficiary of the “de-risking” trend from manufacturing hubs in China. These countries will also be under our watchlist going forward.

We maintain the view that Asian economies and corporate earnings will continue improving considerably from 2022 levels. Valuations in Asian markets are also fair-to-cheap relative to their long-term average. On the other hand, US equity markets will likely continue to post slowing growth, despite their fair-to-expensive valuation compared to their long-term average. In Europe, we are deeply concerned of the long-term effects caused by the Ukraine-Russia conflict and will be extremely selective if investing in this region.

Market Outlook - June 2023

The US market has stabilized and is currently enjoying an appreciation after the latest debt ceiling raise, calming nerves among investors. We are not as optimistic as there are still economic concerns still unresolved ranging from the still stubbornly high inflation, continued monetary tightening stance, weakening growth prospects to the wobbly banking sector. Furthermore, there is ongoing wrangling between US and China on various fronts, which may culminate into something negative in the long term. We are also monitoring the current market rise with some caution, as it was driven by only a handful of names in large cap growth stocks, while company earnings continued to be pressured by the negative impacts of credit tightening.

One of the biggest economic surprises of the year was China’s speedy reversal of its zero-COVID policy. Yet despite a strong rally since last October’s low, the Chinese market has given back most of this year’s gains. Concerns over the robustness of China’s economy and geopolitical risks have weighed on the market.

In our view, increased clarity on geopolitical risks and an earnings recovery should act as catalysts for Chinese equities in the months ahead. Sentiment can turn quickly in a market trading at depressed valuations. Market sentiment on China’s growth outlook has soured of late, in contrast to the burst of optimism after the end of Beijing’s zero-Covid policy. We believe the Chinese economy’s cyclical upturn is intact. The latest result releases have shown major Chinese companies reporting strong sales and earnings, and the profit recovery would continue to accelerate. The PBOC cut the 7-day reverse repo rate by 10 bps to 1.9% from 2.0% and the Medium-Term Lending Facility rate from 2.75% to 2.65%, a signal that the government is intent on shoring up the still-weak economy. We have little doubt that Chinese stocks are currently near its historic low and there isn’t much downside. Confidence would eventually return from continued recovery in both the economy and corporate earnings for the rest of the year.

Markets will continue to be buffeted by tension between China and the US and its allies. This is an issue market participants have to be aware of and endure for a long time to come. We think there would not be any letup by either country, especially on the Taiwan issue.

In our view, major power conflicts remain a tail risk due to the restraining influence of nuclear deterrence, and the likelihood of a direct military conflict between US and China remains a remote possibility. However, geopolitical rivalry and tensions will continue to escalate, spurring increase in defence expenditure, intensified competition over strategic commodities, and a shifting economic advantage towards neutral countries.

In other areas, Beijing instituted a ban on Micron Technology Inc in an escalating semiconductor war. Concurrently, the Group-of-Seven leaders meeting in Japan pushed ahead with efforts to reduce dependence on China for critical supply chains. Furthermore, there are talks of a potential US executive order limiting outbound investment to sensitive high-tech Chinese sectors, igniting fears that this measure could be broad in scope which could affect many companies in both countries. “Non-hot-war” news like this would be our focus, as these are highly probable events that would eventuate between the two superpowers of the world.