Our House Views

1.  What does the recent spike in US Treasury yields mean?

• US Treasury yields have reached multi-year highs and there are two reasons for the move. Firstly, the US economy and the consumer market remain resilient, as evidenced by the strong macro and retailers’ earnings data. Secondly, rising bond issuance has pushed up the yield at which supply and demand match. 
• The spike in Treasury yields is driven by real yields rather than long-term inflation expectations and provides a good entry point. Markets have now given up on quick rate cuts in the next 12-18 months and priced in just four cuts by December 2024. Although Chair Powell made it clear at Jackson Hole that the FOMC will remain data dependent and restrictive, we  maintain our projection of a total cut of 0.75% starting in Q2 2024 and the Fed funds rate to reach 4.50-4.75% by the end of 2024. This gives us greater comfort in the short and medium-dated Treasury yield levels.
• Since we adopted an overweight positioning for investment grade (IG) in July 2022, spreads have tightened somewhat and are now close to their 5-year average. We take some partial profits and move into US Treasuries, which are now upgraded to overweight, while still maintaining an overweight position for IG credit with medium maturities. Historically, both Treasuries and IG outperform cash in the next 6 months after rates peak.

2. What is our view on the Chinese equity markets?

• China’s economic data continue to be disappointing with the property market being a key drag on growth. The news flow has become more challenging recently. The potential default of a large Chinese privately owned developer has raised contagion fears for the broader housing market, shadow banking sector and Chinese banks. Further shadow banking defaults could lead to tighter liquidity conditions for the property and onshore capital markets. We believe the authorities will continue providing positive support but those measures will be gradual given their focus on structural reform direction rather than a “big bang” approach. The scope for a rebound in the short term is limited.
• As many Hong Kong developers are exposed to mainland China, and because of the continued surge in office supply and low office leasing demand, we expect to see some weakness in stock performance.
• Therefore, we downgrade both mainland Chinese and Hong Kong equities to neutral and, as a result, Asian real estate to underweight. Valuations remain attractive. The recently announced secondary market measures, including stamp duty cuts, new restrictions on share sales by major stakeholders, and lower deposit ratios for margin financing, help provide  technical support to the market. We prefer service consumption and travel-related sectors, such as internet leaders, airlines, travel plays, consumer discretionary and Macau gaming. We remain overweight on Asian ex-Japan equities, favouring Indian and Indonesian stocks.

3.  Should we broaden our sector exposure given high valuations of IT?

• Technology and communications have outperformed in the US equity markets year-to-date, raising markets concerns over their higher valuations. The former is more justified due to its stronger earnings prospects. We choose to take some profits on US communications and move it to neutral.
• While an improved structural outlook favours cyclicals in general, we see strong tailwinds in the US healthcare sector, compensating the regulatory risks on drug prices. These include innovation around immuno-oncology, obesity and rare diseases. Together with the increasing demand for treatment of age-related and chronic illnesses, we see upside potential for the sector despite its year-to-date underperformance. 
• The upgrade of US healthcare to overweight will help create a balance between value and growth within a portfolio. We maintain a pro-cyclical bias, overweighting technology and consumer discretionary across the regions, and additionally industrials and financials in the US and globally.