The latest US GDP growth and inflation data further cemented the market’s pivot towards higher-for-longer US interest rates, and its effects are reverberating around the world. Higher-for-longer US interest rates have implications not just for the US but also the rest of the world, owing to the importance of the US dollar in trade and the global financial system, as well as the resulting effects on exchange rates.
The first reading for GDP growth for 1Q2024 came in at 1.6% annualised — below market expectations of roughly 2.4%. But the weakness in the headline figure is due primarily to inventory drawdown and lower net export, which tend to be volatile. Importantly, consumption, which is the main driver for growth, remained resilient. In fact, consumer spending on services grew at a faster clip compared to 4Q2023. And, more critically, the core personal consumption expenditure (PCE, excluding food and energy) price index, the Federal Reserve’s preferred inflation gauge, rose at an annualised rate of 3.7% in 1Q2024, up sharply from 1.8% in 4Q2023 and above the recently revised upwards market forecast of 3.4%.
The slew of recent data underscores inflation stickiness. While the initial phase of disinflation came quickly with the reversal of pandemic supply shocks, price increases are now underpinned by strong aggregate demand, from both consumer spending as well as government deficit spending. For instance, the Biden administration is doling out billions in subsidies to the semiconductor industry, to spur domestic manufacturing. Even the US$61 billion in aid to Ukraine (that just passed Congress) will first go through the US economy — sending existing weapons stockpile to Ukraine and replenishing its inventory with new weapons manufactured domestically.
The job market is strong and real wage increase is positive, giving consumers greater confidence to spend. Yes, lower-income households are feeling the pinch of rising prices. But higher-income households are getting a boost from a positive wealth effect from the equity and real estate markets. At the same time, fixed mortgage rates are buffering the cost of higher interest rates, which ironically is generating income for savings at a level not seen since the global financial crisis.
In such a scenario, we suspect inflation and therefore interest rates are likely to remain higher for some time yet. Yields on the benchmark 10-year Treasury have risen to the highest levels since November 2023, as bets for interest rate cuts were pared back further. The market is now pricing almost 20% probability for no interest rate cut this year, down from as many as six at the start of the year.
Optimism for rapidly lower rates — which was driving stock prices higher by way of valuation expansion — is fast fading. It is getting harder to sustain lofty valuations and drive prices higher across the board. In other words, unlike the broad market rally underpinned by rate cut expectations, investors are acting more discerning, leaving individual stocks more vulnerable to earnings disappointments. And that is leading to increased market uncertainties and volatility. Case in point: Shares in Meta Platforms were hammered after the company announced higher capex and slower monetisation for investments in artificial intelligence (AI). And Google’s parent, Alphabet, also announced hefty capex increase but its shares surged after the company disclosed additional share buyback and maiden dividends.
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As with previous optimism over rate cuts, we think there is excessive expectations for AI-driven profits growth. We have no doubt AI will drive growth, but this would play out over years. Nvidia is uniquely positioned to benefit from the surge in AI capex spending. For most businesses, however, returns on investments in AI will materialise over time, from new services/products, productivity gains and cost savings rather than the kind of big-bang profit spike of Nvidia.
Not surprisingly, our US stocks were among the worst performers in the month since we started Tong’s Absolute Returns Portfolio. And as we said, higher-for-longer US interest rates have global impact. Our two Hong Kong-listed property stocks were also affected by expectations for higher-for-longer mortgage rates — partially offsetting improved buyer sentiment, following the removal of all previous property market cooling measures, which had lifted prices in the secondary market. Swire Properties, which has a lower gearing, is faring better than Sun Hung Kai Properties. SHKP was the one of the biggest underperformers in our portfolio, with 5.6% losses. The stock fell sharply after a big block of shares was sold at a discount to prevailing market price before recovering some lost ground.
Conversely, our two Singapore banks, Oversea Chinese Banking Corp and DBS, are benefiting from the US interest rate cuts delay, seen as positive for net interest margins. DBS is currently the second-best performer in our portfolio, with 7.8% gains. The shares continued to attract investor interest after going ex-entitlement for its one-for-10 bonus issue, and after its upbeat 1Q2024 earnings results. DBS is expected to continue with capital management and return excess capital to shareholders via higher dividends. We are upbeat on the long-term outlook for Singapore banks. Of note, our gains in US dollar terms are lower than those in the Singapore dollar — because of the appreciating greenback.
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The same is true of our investment in Itochu, which is up nearly 10% in yen terms but only 4.3% in US dollar equivalent. The yen has tumbled to a fresh 34-year low against the greenback, after the Bank of Japan kept monetary policy unchanged in its latest meeting. There is growing speculation that BoJ will intervene (perhaps it already has intervened) to prop up the currency. Again, higher-for-longer US interest rates have wide-ranging implications for the rest of the world.
It is to the US’ benefit now to maintain the greenback’s strength — to lower import costs and help offset domestic inflation. But it is painful for consumers in the rest of the world, as their currencies depreciate, worsening imported inflation. It is also creating a dilemma for central banks. Case in point: Bank Indonesia surprised the market with a 25 basis point rate hike last week to help steady the falling rupiah, despite concerns of the dampening effects on the economy. At the very least, many central banks are forced to delay monetary easing that would support domestic growth.
Tencent is, by far, the top performer in our portfolio, chalking up 19.6% gains from our initial cost. Its valuations have fallen sharply in the broader market sell-off in Chinese stocks over the past two years. With growth slowing, it is increasingly focused on improving margins and shareholder returns (through dividends, share buybacks and distributions in specie). The company continues to generate positive free cash flow. In addition, it has been unlocking value in previous investments, including the partial sale of its stakes in Meituan, JD.com and Sea, which is generating additional cash — and it has been actively buying back its own shares. Share buyback rose sharply to HK$49 billion last year (more than the last 10 years combined) and will double to HK$100 billion in the current financial year. (Chinese mega caps such as Alibaba Group Holding, Meituan and Xiaomi have stepped up their share buyback programmes as prices tanked.) Tencent is the second-largest shareholder in recently listed Reddit. Notably, the Chinese government appears to be more supportive of the gaming industry, and has been approving more new games. Tencent’s planned May release of a popular and hotly anticipated new game added to the buzz surrounding its stock.
Aside from the US-listed stocks and SHKP, Airbus (-10.1%) was the other big loser in our portfolio, compounded by the weaker euro against the US dollar. Its recent first-quarter results were disappointing and missed market expectations, on the back of weak deliveries, with its most profitable aircraft, the A320, falling short. Positively, the company provided upbeat guidance and outlook for 2025. We remain optimistic on its long-term prospects, given the record unfilled-order backlog.
The Absolute Returns Portfolio gained 0.2% for the latest week ended May 1, lifting total returns since inception to 0.4%. Meanwhile, the Malaysian Portfolio fell 0.3% over the same period. We added four stocks to this portfolio, Maybank, KSL Holdings, CCK Consolidated Holdings and IOI Properties. The top gainers last week were CCK (+1.9%) and IOI Properties (+0.9%) while Insas-WC (-6.4%), KSL (-1.7%) and Insas (-1.0%) were the notable losers. Total portfolio returns now stand at 187.3% since inception.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
