The team at M&G Investments sees “better buying opportunities” for broad equity risk later in the year if interest rates were to come down due to a slowing economy.
The M&G team adds that being “nimble” in asset allocation will be crucial in 2024 as the market is expected to respond to “various unpredictable events” such as elections, economic slowdowns and central bank policies.
“The emphasis is on being prepared to respond to volatility in these areas, suggesting a flexible and dynamic asset allocation strategy,” says M&G.
“From a multi-asset perspective, we favour fixed income over equities, particularly with a shift to a shorter duration on the US yield curve. With the anticipation of lower rates, signalling a slowing economy, this could offer a favourable buying opportunity for broad equity risk later in the year,” notes Michael Dyer, investment director for multi-assets.
“We are actively seeking smarter growth in Asia, focusing on our highest conviction position in buying Hong Kong and China equities amid negative market sentiment. Our strategy involves emphasising on developed Asia, aligning with our outlook for smarter growth opportunities,” he adds.
Fixed income is also expected to do well, providing diversification benefits, even if central banks over-tighten.
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Pierre Chartres, fixed income investment director, is “constructive” on government bonds, especially US Treasury yields, which present an “attractive” risk-reward profile relative to their historical levels. However, he is remaining cautious on corporate bonds due to valuations.
Meanwhile, the M&G team likes investment grade bonds with a maturity of under five years. Such bonds, with yields of between 6% to 7% as at the analysts’ report on Jan 16, is deemed favourable compared to the historical average of 4.6%.
“This attractiveness is bolstered by an expectation of decreased volatility and a net negative supply in the market,” says the M&G team.
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“The discussion indicates a careful, valuation-based approach to global fixed income portfolios, with a preference for government bonds,” says M&G.
Despite a slower pace of rate cuts from Asian central banks, M&G’s head of fixed income for Asia Pacific (APAC), Low Guan Yi, sees attractive valuations in local currency bonds in places such as India, where the inflation trajectory supports government bonds.
“The inclusion of India in global bond indices is an additional bullish factor,” says Low.
“We see China, with its determined policy stance, as a potential dark horse, particularly in efforts to stabilise the real estate sector. We anticipate further measures and a turnaround in sentiment, making it a candidate for positive surprises,” she adds.
Taking a closer look at Asia
During the year, Asian central banks, excluding Hong Kong, are expected to maintain independent monetary policy rates while being influenced by the US Federal Reserve (US Fed), says David Perrett, co-head of Asia Pacific equities.
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“Controlled inflation, coupled with China’s moderating impact on the region, is anticipated to allow for more lenient monetary policies in various countries. This flexibility is seen as advantageous for pricing equity risk,” he adds.
To Vikas Pershad, portfolio manager for Asian equities, supply chain dynamics and geopolitics should be companies’ primary concerns as opposed to high interest rates due to a period of interest rate normalisation and rates.
“The shift from a ‘China plus one’ to a ‘one plus India’ approach is evident in our conversations with companies. In other words, we see companies incorporating India into their manufacturing and supply chains, moving from a singular emphasis on China,” he says. “We see opportunities across Japan, Hong Kong, India, and Southeast Asia,” he adds.
Will interest rates remain high?
“We believe the Fed’s policy shift will address prevailing pessimism about the economic profile, potentially benefiting Asia due to its strong links to global growth. Forecasts suggest a clear path to reaching inflation targets, lending credibility to the possibility of the Fed cutting rates,” says Low.
In Asia, with central banks hiking rates at a slower pace, the economic outlook for Asian countries seems more favourable compared to the US and Europe, she adds.
“We believe that the upturn in the manufacturing goods cycle, especially in electronics which Asia is exposed to, is expected to contribute to a positive economic trajectory this year,” she continues.
Chartres notes that central banks are likely to achieve their inflationary targets over time as the firm has seen a “recent acceleration of the disinflationary trend over the last three to six months”.
In the developed markets, particularly the US, Europe and the UK, growth is likely to persist “below trends”, providing ongoing support for government bonds, he adds.
