Substantial rate cuts are unlikely without a US recession

01

Substantial rate cuts are unlikely without a US recession

The S&P 500 has risen since December on rate cut expectations. At the point of writing, the market is pricing in 150 bp of rate cuts from the Fed this year1. We believe that significant policy easing is unlikely without a US recession.
Our take: We expect the US to enter a mild recession in the next 6 to 12 months, and weaker corporate earnings growth should send US equities lower in the medium term. Emerging markets, which have underperformed in 2023, may yield more attractive opportunities.

Substantial rate cuts are unlikely without a US recession

02

Emerging markets offer better value

We expect recessions to be concentrated in the developed markets where interest rates have risen the most. Emerging markets should still fare better despite slower growth. With the US market trading at 19.6x 12-month forward earnings, Asian equities offer better value at 12.2x2.
Our take: With most funds currently underweight Asia, increases in exposure could drive and magnify equity market returns.

Substantial rate cuts are unlikely without a US recession

03

Indian equities could enjoy a 9th year of gains

India is expected to contribute 15% (the second highest) to Asia’s economic growth in 2024. The economy’s strong fundamentals, ongoing structural reforms and supply chain gains are likely to continue to boost foreign investor interest.3
Our take: While India’s upcoming elections in 2024 may increase market volatility, it potentially creates an opportunity for investors to add exposure at more attractive valuations. We like Financials, Retail, Auto, Infrastructure and select consumer-oriented sectors.

Substantial rate cuts are unlikely without a US recession

04

The BoJ is poised to normalise

Although the Bank of Japan kept its monetary policy unchanged in January, the central bank is expected to gradually exit from its negative interest rate policy and yield curve control framework in 2024. The ongoing FY24 Shunto spring wage negotiations suggest further momentum in wages, which is one of the keys for self-sustaining inflation. We expect Japanese equities to continue to be driven by corporate governance reforms and ROE improvement.
Our take: Stock picking, with a focus on valuations and earnings would be even more important after the Japanese equity market’s rally in 2023.

Substantial rate cuts are unlikely without a US recession

05

Bonds are diversifiers again

Despite the 20 bp rally in US 10-year Treasury yields since 12 December, yields are still elevated relative to history, which allows bonds to be portfolio diversifiers again. Given our base case scenario of a US recession, bonds can boost portfolio returns even as equities underperform.4
Our take: Given slower economic growth, we prefer quality bonds in the US and Asia.

Substantial rate cuts are unlikely without a US recession

06

76 countries are scheduled to hold elections in 2024

This record list includes eight of the ten most populous countries in the world —Bangladesh, Brazil, India, Indonesia, Mexico, Pakistan, Russia, and the United States. Historically, elections may usher in some market volatility although economic fundamentals should be the key drivers over the medium term. Nevertheless, investors should not be overly complacent.
Our take: Diversified portfolios, dynamic asset allocation which includes low volatility solutions can help investors navigate the election-fuelled market volatility in 2024.


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