Our House Views

1. Is the peak of policy rates around the corner?

• Headline (5%) and core inflation(5.6%) y-o-y in the US continued to fall in March thanks to lower goods, energy and rental costs, leading to markets to price in one more rate hike. The downward trend of inflation is positive for both equities and bonds.
• Given the current economic and financial backdrop, we maintain our view that there are likely to have two 0.25% rate hikes by June, pushing the Fed funds rate to peak in the range of 5.25-5.50% until Q2 2024. While the US banking industry seems resilient, there are increased downside risks to growth and upside risks to unemployment.
• As a result, we remain focused on investment grade with maturities up to 5-7 years to lock in higher yields. As earnings downgrades should continue in the financial, real estate and technology sectors in particular, we favour quality companies with profitability and manageable leverage.
  

2.  What support our neutral stance on global equities?

• Following some volatile weeks, markets have further calmed down with equities having rebounded. We think the bounce has not come from earnings or economic growth but rather from rates, as proven by the high correlation between bonds and equities. As hopes for rate cuts are premature in our view, we favour companies, sectors and geographies that can deliver solid earnings growth.
• Although slowing growth, as well as tighter financial conditions and margins, will lead to further earnings downgrades in the US, we believe that an imminent recession is unlikely and expect earnings to change in H2. Moreover, in the six prior monetary policy tightening cycles, US equity markets rallied almost 20% in the subsequent 12 months after Fed paused, supporting our overweight on US equities. In the UK, as economic data seem to have bottomed, we believe that the Bank of England is likely to deliver only two more 0.25% of rate hikes and then pause (markets are pricing in three hikes ). This supports valuations which are currently cheap. We upgrade UK equities to neutral.
• In contrast to slowing growth in the West, China’s reopening and strong Q1 GDP data of 4.5%, along with improved fundamentals in Asia, make the region a sweet spot to invest compared to developed markets. In short, we remain neutral on global equities, and stay invested and diversified in quality assets.
  

3.  How to position sector allocation amid reduced cyclical risks?

• Cyclical risks are reducing on the back of the easing banking crisis, as well as peaking policy rates and falling inflation in the US. While cyclical stocks have underperformed, they are cheap relative to their historical levels and the defensive sectors, presenting good opportunities in selected space.
• With increased potential for structural growth in technology (e.g. automation and AI development), we upgrade global and US IT to overweight. As valuations are not cheap, we focus on companies that will deliver on earnings. We downgrade global energy to neutral as further upside on prices is limited but cash flows should remain strong. Tightening credit lending and less likelihood of quick rate cuts lead us to underweight global and US real estate. We also upgrade industrials and downgrade healthcare to neutral in Asia amid a better cyclical outlook in the region.
• Interest rate sensitive sectors such as housing, autos, financials and (to some extent) IT will see further downgrades. A mixed sector allocation between cyclicals and defensives is still recommended although we have moved to a mild cyclical tilt.