Isaac Lim, chief market strategist at Moomoo Singapore, thinks the US Federal Reserve is unlikely to enact any rate cuts this year. This flies in the face of consensus forecasts — votes are highest for a July reprieve — and even the Fed’s own prior promise of a 2024 cut.
He cites the latest consumer price index and unemployment figures, which show the US economy “is still very strong”. “My personal take is even if there’s a rate cut, the question is, how fast and big will the rate cut be? If you have a small rate cut, and the economy is still growing, inflation is still creeping in, that makes the rate cut pretty useless.”
Lim’s comments came just 20 minutes into The Edge Singapore’s Mid-Year Investment Forum 2024 on May 25, which carried this exact theme: “Rate cuts delayed”. The Fed will meet again on June 11 and 12.
In conversation with Felicia Tan, associate editor at The Edge Singapore, Lim says US tech names are technically overdue for a correction, and recent weaknesses were “more of a retracement”.
“I gave my team an analogy of a rubber band,” he says. “You stretch the rubber band and you let go, the snap back is painful. But if you stretch the rubber band for longer, the snap back will be even more painful.”
The S&P 500 and Nasdaq 100 posted record highs earlier that week after Nvidia’s blowout earnings, released on May 22. “The very technical answer is yes, there will be a correction,” says Lim. “By how much? I think it’s getting tougher to answer.”
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Utilities, communications outperform tech
Lim’s presentation, titled “In search of alpha: Combining financial analysis and technical analysis”, showed how investors should look beyond headlines when practising technical analysis.
See also: ECB’s Schnabel sees only limited room for further rate cuts
While tech names like the Magnificent Seven may be top of mind for many investors, two other S&P 500 sectors actually outperformed them year-to-date, according to Lim’s chart.
The Utilities Select Sector SPDR Fund and Communication Services Select Sector SPDR Fund are neck-and-neck with the Technology Select Sector SPDR Fund. As of May 24, however, the communication fund is tops with a 14.81% gain year-todate, with tech right behind at 14.8% and utilities at 11.28%.
Looking further, Lim urges investors to combine fundamental analysis and technical analysis to identify stocks that could outperform.
If the communication sector is showing the strongest growth year-to-date, for example, investors could zoom into individual counters and look for confirmation, he adds. “Does the fundamental analysis [of the stock’s] fair value confirm the technical analysis outlook?”
China, Japan and Singapore markets
Lim was one of the earlier analysts to declare the start of China’s recovery. In response to questions from the audience, Lim says there is “still room for growth”, and he would want to see the Hang Seng Index (HSI) recover “above the psychological level of 20,000 [to] 20,200 [points]”.
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As at May 24, the HSI is trading at 18,608.94 points, up 5.43% over the month and 10.84% year-to-date. This is, however, down from some 30,000 points in 2021, which had neared the HSI’s peak in early 2018.
“I want to see the fundamentals confirm the technicals,” says Lim. “Right now, from a technical perspective, we are already in a technical recovery… But fundamentally, we’re still seeing the property sector, which is a huge component of the Chinese market, lagging behind.”
The Nikkei 225, meanwhile, has been relatively quiet since hitting an all-time high in March. Lim still sees further upside for the Japanese market as it is “very correlated to the US market from the tech side of things”.
He adds: “The only issue with the Japanese market right now, I believe, is the Japanese yen story.”
On the Singapore market, Lim says the Straits Times Index (STI) constituents are “very good defensive stocks to put in your portfolio”. He adds: “Depending on the lens that you look through, you can either say it’s really boring, there’s no growth, or you can look at it from another way and say that it’s a defensive play to have in your portfolio.”
The Singapore dollar’s relative strength is another plus, Lim adds. “I know we just talked about the Nikkei and I see further upside, but if you’re holding a Japanese stock, there comes a point in time where the yen [may] get so weak that it’s not going to be worth your while holding on to it.”
Gold ‘not a safe haven’
Gold price recorded a new all-time high on May 20, while silver was trading near an 11- year high. Bullion jumped as much as 1.1% to hit US$2,440.59 an ounce that day, surpassing a previous intra-day record reached in April.
Gold has been a good store of value in the low interest rate environment of the past 20 years, says Lim. “But if you look further than that, the previous 20 years before that, you’ll see that in a high interest rate environment, gold does not necessarily do very well.”
The correlation between gold prices and the S&P 500’s performance has been “very, very strong”, says Lim. “That throws the traditional, textbook understanding of correlation out of the window. Gold, at this point in time, is not really a safe haven.”
For those seeking a safe haven, Lim recommends holding “higher interest-bearing instruments at this point in time”, such as US treasuries.
Conversely, it “also makes sense” to hold onto gold, he adds. “Gold and silver commodities have been actually on a tear; it’s been climbing higher with the all-time highs and that is the trend, at least till the end of the year.”
Election year
Over four billion people in some 40 nations and territories are scheduled to vote, or have gone to the polls, this year.
The Edge Singapore noted the impact of this on the global markets in our first cover story of the year (Issue 1119: Could 4 billion voters shape global markets in 2024?).
Based on historical charts, if newly minted Prime Minister Lawrence Wong calls for an election this year, the STI could fall, according to Lim. “If you look at the past four general elections [in Singapore], the first year after an election, the STI dips anywhere from 9% to 12%... But after that, the STI continues sideways.”
The US elections are scheduled for November. “It doesn’t matter which party wins; it doesn’t matter who is the [US] president. The first year after a new president takes office, the STI actually grows 12% to 14%. It’s very different behaviour,” notes Lim.
Based on the past four US elections, the S&P 500 reacts similarly after votes are cast, says Lim. “The first year that the US president is voted into office, the S&P [500] actually climbs 16% to 22%.”
Photos: Albert Chua/The Edge Singapore
Infographics: Moomoo Singapore
see also: US Fed not in a hurry to cut rates as consumer confidence remains healthy
