Asia, as a whole, is set for a better 2024 compared to this year, as central banks of this region hold on to rates along with the US Federal Reserve, so as to discourage funds from exiting. Later in the year, with the US economy heading for a soft landing, regional markets can enjoy a relief, thanks to a generally weaker US dollar, which makes it less attractive to move funds to the US, says wealth manager UBS.
With this as the backdrop, Asian central banks might then cut their rates by an average of 50 basis points in the second half of 2024, which will help create some tailwinds for regional equities.
Another way to feel cheery for Asia is that excluding Japan, Asian market valuations are below their five-year average even as earnings growth in the high teens can be expected, especially from Korea and Taiwan.
However, global risks remain, and investors with the reach and means ought to position for relative opportunities within Asia, and refrain from taking directional calls. As a quick summary, given Indonesia’s sensitivity to US rates, UBS has downgraded the market from most preferred to neutral. Malaysia, in contrast, has been upgraded from least preferred to neutral due to its relative resilience in previous higher-for-longer episodes.
India is favoured for its strong domestic economy and foreign interest. But there are near-term risks: Food Consumer Price Index has bounced and another rate increase from the Fed or aggressive oil price rallies could spur a final hike from the Reserve Bank of India. Still, consumption and construction demand remains healthy, funded by vigorous bank credit. UBS expects earnings to be the main driver of the market, with a potential re-rating catalyst if deposit rates peak.
China is a relative overweight too, with policy implementation continuing to be a near-term catalyst. UBS sees some easing of the pressures in the capital and property markets. There will be additional government support, such as the surprise issuance of special China government bonds in October.
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While China has more policy levers to pull domestically, it remains affected by external factors. The way UBS sees it, macro recovery needs more time and support. Meanwhile, there is an earnings recovery in China already underway, and MSCI China is at one standard deviation below the five-year average, as global investors prefer to put their money elsewhere. This means China has room for more tactical outperformance opportunities.
Singapore banks
In contrast, Singapore is not as preferred among the regional markets. The local listed tech names should benefit from the global tech rally, and the REITs, which make up a significant chunk of many investors’ portfolios, should benefit from lower US rates as well. Nonetheless, the economy is heavily exposed to global trade and is seen to grow at barely 1% or so, which further weighs on business activities and thus loan growth, although the views should change when the global trade cycle resumes moving upwards.
The three local banks, which make up nearly half of the weightage of the Straits Times Index, are at a point where upside from net interest margin has peaked, as moves by the US Fed indicates. “You cannot capitalise on that further and that in turn basically means there’s going to be a cap as to how much the banks can,” says Kelvin Tay, regional chief investment officer at UBS Wealth Management, in an interview with The Edge Singapore.
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On the other hand, fee income, the other key earnings contributor to the banks, is dependent on the level of trading activity in the market. Unfortunately, with China, Hong Kong and other regional bourses in soft patch, to say the least, this fee income segment cannot be relied on too heavily as an earnings driver as well. Thus, much will depend on the performance of the US markets, which Tay says are basically what many investors are focused on.
Now, Tay cautions that a big chunk of growth and trading in the US markets is driven by only a handful of mega tech stocks, specifically, the so-called Magnificent Seven: Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta Platforms and Tesla. In short, the concentration risk is something to bear in mind.
If the US economy heads lower in 2024, and the market becomes more “flattish”, investors will be more eagerly anticipating the next catalyst, which would be the start of the Fed’s rates-cutting, says Tay. “And how much do they cut? How fast can they cut? That will be the rhetoric, first of all, but rhetoric will change from [what it is] now to when will the Fed cut?”
Fundamentally, the rate decisions stem from the need to curb the bigger scourge of inflation. Central bankers and investors ought to recognise that there has been a structural change: that inflation will always be higher than before in this new era of de-globalisation. “You cannot buy from the lowest provider, you have to buy from your friend, and you’re always behind, because we cannot be cheaper than China, simple as that,” says Tay.
Positive on oil
UBS remains positive on oil, which at the end of the day is driven by supply and demand fundamentals. In this coming year, Tay believes that supply is not increasing as much as demand. For one, the cartel of oil producers Opec+ is in no mood to help bring down prices by ramping up production, thereby hurting its own coffers. Next, China, a key source of demand, should see its economy eventually stabilise, and obviously drive up demand.
Interestingly, Tay points out that geopolitics, the obvious reason for energy volatility, is not necessarily a longer-term factor affecting oil prices, except maybe the first few weeks when certain events happen and the market’s knee-jerk reaction kicks in. “Other than that, it always boils down back to supply and demand fundamentals,” says Tay.
Having said so, the oil industry, riding on the earnings spike from the last couple of years, is in an acquisitive mood. In October, within days of another, Chevron announced it was buying Hess for US$53 billion ($71 billion) while ExxonMobil was snapping up Pioneer Natural Resources for US$59.5 billion, signalling their intention to double down on fossil fuel even as the wider ESG movement takes place.
For Tay, this seemingly counter-trend move makes sense. “The transition to renewable alternative cannot happen overnight, okay? The world is very, very dependent on all these fossil fuels. And the majors are making a lot of money, right?”
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From the perspective of the oil majors, given “extremely high” revenue and “very, very strong” cash flow, they are still left with a huge cash balance even after paying out special dividends every now and then. “You basically acquire, you enlarge your market share, you make your market position more dominant,” he says.
Tay acknowledges the need to transition to renewable energy, but this will be a very long journey. There are still certain mineral resources, such as coking coal, that have no immediate substitute. Airlines, a major consumer of fuel, cannot turn “electric” any-time soon, and remain as one of the bigger polluters out there. While there are pilots to try out bio-fuel, the entire supporting infrastructure of the industry has to move along, taking some 10 to 15 years. And consumers have to be prepared to help bear the higher costs involved, he says.
Transforming industries aside, Tay points out that the easiest way to cut down on emissions from travel is to build more high-speed railway lines. There are numerous pair cities with existing air passenger volume that can be substituted by high-speed rail links, such as San Francisco and Los Angeles, as well as Sydney and Melbourne. “China’s addition to global warming will be a lot higher if not for the 40,000-km-long high-speed rail network,” says Tay. “These are easy things that we should be doing, but many of these countries don’t have the political will to do it.”
Paradoxically, despite the focus on ESG, funds with sustainability as the theme have been found, according to numerous studies, to have underperformed the wider markets. “Over time, the volatility should drop, as more and more investors become educated about ESG,” reasons Tay.
He stresses that the importance of going green has not diminished, and the worst attitude is to continue as before. “We cannot carry on like the whole place is going to be destroyed, and so there’s no point having any kids or grandchildren. There will always be setbacks along the way and we need to be realistic, be pragmatic about it,” says Tay.
