Our House Views

1.  Is the hiking cycle going to end soon?

• The Fed raised funds rate by 0.5% in December as expected. While the pace of rate hikes may slow on easing inflation, the Fed indicated clearly that tightening is not over as inflation will be stickier than previously thought. We expect a final 0.5% hike in February before  the first 0.25% cut in Q2 2024, followed by another 0.25% in Q3 2024.
• The European Central Bank (ECB) and Bank of England (BoE) also hiked rates by 50bps, yet guidance was divergent. We think the BoE will peak policy rate at 3.75% with a 0.25% hike in February, while the market is pricing in a higher deposit rate to over 3% in Europe (currently at 2%) with a hawkish ECB tone, which aligns with our view. 
• Despite slowing growth, we remain overweight on US equities due to the solid labour market and healthy household and corporate balance sheets. Earnings outlook is expected to improve from the H2 of 2023.  We stay underweight on Eurozone and UK equities to mitigate recession and inflation risks. 

2.  Is it time to take more risk?

• While we see silver linings on the back of easing inflation and peaking interest rates, as well as China’s decisive policy pivot towards growth stabilisation, there is still uncertainty around geopolitics and the exact timelines of when the rate, inflation and growth cycles will turn.
• Peaking US rates and easing inflation should create a more favourable environment for bonds, with bond yields having spiked significantly. Expectations on future rate cuts will also benefit bond prices. We prefer investment-grade bonds to manage earnings slowdown, while short-to-medium duration (up to 5 years) can navigate interest rate volatility.
• As the economic growth cycle lags the interest rate cycle, we believe it’s too early to add cyclical risk through equities. We remain defensive in our sector strategy and look for regional advantages in the US and Asia, including Hong Kong, mainland China, Thailand and Indonesia. Economic re-opening is a key growth driver, while Southeast Asia also benefits from supply chain reorientation and China’s re-opening.

3.Should we expect a quick rebound in mainland China?

• The additional COVID relaxation measures introduced recently
  (e.g. negative nucleic acid results for cross-regional travellers and temporary lockdowns discontinued) have materially lifted market confidence. The government has also ramped up funding support for the property sector through increased credit supply, policy support for new bond issuance and equity financing for privately-owned developers.
• However, we don’t expect a quick rebound in growth. A strong recovery from Q2 2023 is more likely as immunity builds up, and normalisation of consumption, production and pro-growth policies provide positive effects. Strong pent-up demand and recovery in service consumption will boost economic growth in the rest of 2023 and into 2024.
• We are overweight on Chinese equities and constructive on themes that will benefit from long-term policy support (e.g. tech self-reliance and green transition). For those Chinese stocks listed in Hong Kong, we see potential in travel and healthcare but short-term volatility will linger.