Our House Views

1.  What is the latest economic data telling us?

• The US and European economies are slowing but the slowdown is less fearful than expected (e.g. stronger than expected US payroll and retail sales data; improving PMI in Europe). Recent data suggest that a deep recession in these markets is unlikely.
• However, the strong US employment data have led to bond markets being concerned about more Fed rate hikes to bring down wage inflation and raising their peak rate assessment to 5.25% or even 5.5%. As inflation continued to fall in January and we believe rental should start to ease, we hold the view that the Fed will make a final hike of 0.25% in March and keep the policy rate at 5% until Q2 2024.
• Bonds continue to offer attractive carry opportunities and we continue to favour quality credit to mitigate rate and growth uncertainty. Given that developed market rates have now reached the upper-end of their trading ranges, we have extended duration positioning on US and European investment grade corporate bonds to 5-7 years to lock in the pickup in yields.

2.  Is recent equity rally sustainable?

• Equity markets see the better data as a good reason to push up cyclicals but further surprises on the upside are challenging. The gap between the price/earnings and Treasuries’ real yield has increased, suggesting that equity valuations may have bounced too quickly. Following the recent equity rally and the sharp sell-off in the US dollar, we expect to see some short-term consolidation for both.
• We remain overweight on US equities due to its tight job market, easing inflation and peaking policy rates, and have added more cyclical exposure to our sector stance but remain neutral overall. The recent rally of US technology was driven by OpenAI’s ChatGPT innovation and AI-related opportunities, as well as cost cutting measures by some big tech companies. Nevertheless, we remain neutral on US technology due to its mixed earnings prospects.
• Geographically, Asia remains our top pick boosted by China’s reopening. As the Asian tech cycle should improve and a gradual recovery in semiconductors globally is expected, we upgrade Taiwanese equities and Asia technology to neutral.  

3.  What to expect from China’s National People’s Congress?

• The rebound in PMIs and stronger total credit growth for January, as well as a significant increase in travel and mobile data usage during the holiday seasons showed signs of normalisation in China.
• We expect to see more government support on both the fiscal and monetary fronts from the National People’s Congress (NPC) to be convened on 5 March. These include continued infrastructure investment through special local government bond issuance of RMB4trn and a bigger stimulus package leading to a national general budget deficit of 3.2% in 2023. Recently, it has also been announced that private equity funds are allowed to invest in residential and commercial properties, as well as infrastructure projects.
• We remain overweight on Chinese equities and selective on China’s property credit with a preference for state-owned enterprises, TMT (technology, media and telecom) and Financials. We expect China’s growth to accelerate from 2.2% y-o-y in Q1 to 7.4% in Q2, and have lifted the full-year growth forecast to 5.6% (from 5%) on a speedier recovery driven by consumption rebound, property market stabilisation and pro-growth policy support.