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Underwater Bubble

Top Questions from our Clients - October 2023

Top Questions from our Clients
Top Questions
Rate Hikes
Equity
Inflation
USD

Top Questions from our Clients - October 2023

Oct 5, 2023

  • Question 1: Are the central banks done with their rate hikes? We believe most of the major central banks (apart from Australia’s RBA) should be done with the rate hikes. But as US growth remains strong, and employment only fraying around the edges, markets worry there is still a risk of further rate hikes. We think this is unlikely, as lagged effects of past rate hikes will keep the labour markets and wage growth in check. We find a good entry point in medium-duration US Treasuries, as yields are at attractive levels. We also expect further strengthening of USD due to continued resilience in the US
  • Question 2: If a soft landing is priced in for the US markets, why should one invest now? The recent sell-off and volatility in US markets suggest a soft landing in the US might not be fully priced in. Most economists forecast slow growth for 2024, which can push the Fed to start cutting rates in 2024, a positive for the US equity market. The recent consolidation has lowered valuation multiples and provides an opportunity to invest. Forecasts suggest earnings expectations should be well above their historic averages, suggesting further upside for US equities. The re-industrialisation of the US, along with the beginning of a multi-year rollout of emerging technologies should continue to support the US markets
  • Question 3: Why do we like Indian equities despite their high valuations? We continue to hold a bullish call on Indian equities, which have been performing well since March this year, and the economic outlook remains solid. Growth and activity data in India remain robust, and PMI data remain in an expansionary phase. Though recent inflation numbers are worrying, inflation should cool down once we are past the monsoon season. India’s equity valuation is near its historical average, and though it is higher compared to other Asian markets, we think this is within a reasonable range because of its stronger return on equity and better margins
  • Question 4: Is economic growth set to slow, and will central banks be forced to cut rates faster than markets think? The global economy is slowing, albeit at diverging speeds across regions and sectors. The services sector has fared well till now, but as higher borrowing costs weigh on consumer spending, we expect it to slow down till year-end. US GDP is expected to accelerate in Q3 2023, while the Eurozone and the UK continue to face stagflation challenges, highlighting the contrast between regions. We also believe DM central banks are done with rate hikes, with the Fed expected to start rate cuts by Q3 2024, but the ECB and BoE still far from it. We lock in current attractive yields in US Treasury and IG Bonds with medium duration and deal with uncertainty through select hedge fund and volatility strategies
  • Question 5: Is the recent run-up in inflation data a sign of a new uptrend in US inflation or a temporary blip in the trend of continued disinflation? The sharp fall in US CPI from 9.1 per cent to 3 per cent between June 2022 and June 2023 can be considered tremendous disinflation and a successful policy effort. However, further progress on the road to the Fed’s 2 per cent target is much harder and will take time. Headline inflation saw an uptick in August, but we do not believe this one-month reversal signals a change in the disinflationary trend in the US. Given the strong demand for housing and the weak level of inventories, it is not surprising that prices have remained elevated, which has kept the core CPI high
  • Question 6: Are the better-than-expected August data in China an indication of an inflection? Despite strong August numbers, prospects for any growth recovery in China remain lacklustre, as the property sector and weak external demand continue to be headwinds to China. Factoring in the uneven recovery path, we recently cut China’s GDP growth forecasts to 4.9 per cent for 2023 and 4.6 per cent for 2024. We anticipate the monetary policy stance to stay accommodative in 2024 with an increased focus on consumption-led growth and in strategic areas. Our favoured investment theme focuses on service consumption winners, including internet leaders, Macau gaming, airlines, travel and consumer discretionary stocks

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For SAA/TAA

 

This is an illustrative approach of a globally diversified portfolio allocation strategy across asset classes; the strategy and the underlying fulfilment options are not applicable to India customers.

 

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