94Ha Viewpoint
The US economy remains robust, and the market expects a “soft landing” of the economy. Inflation data is also close to the target level, but we believe that the market’s expectations for the US Federal Reserve to cut interest rates are too dovish. As the financial environment gradually improves, risk assets may improve. We continue to increase the high allocation to stocks in multi-asset portfolios, but investors should also pay attention to factors such as election risks that may have a short-term impact on the market.
The Fed’s focus may shift to inflation next year
The current market generally believes that the US economy will have a “soft landing”, changing the pessimistic expectation that it will enter a recession in the third quarter. We believe that the current market’s expectations for the Fed’s interest rate cuts are too dovish. Looking back at historical data, in the “soft landing” cycle, the Fed’s interest rate cuts are usually one-quarter of the highest interest rate, and the policy easing cycle usually lasts for seven months. Therefore, this round of interest rate cuts may end in the first quarter, and the Fed is expected to make two to four more interest rate cuts.
Investors should note that inflation still faces upside risks, including potential energy shocks under geopolitical risks, the housing market and/or continued wage growth. As inflation trends and economic conditions change, the Fed’s focus may shift to inflation again next year.
Chinese authorities have taken decisive actions to support economic growth. Market sentiment has improved significantly as authorities have strengthened policy coordination. The current policy focuses on achieving the 5% growth target, with little attention paid to structural issues such as deleveraging the real estate sector and boosting investment/consumption confidence.
Allocate multiple assets to achieve sustainable returns
As valuations of Chinese stocks are still at a low level, funds from retail investors may become a driving force for the stock market. We will closely monitor more policies announced by the authorities to assess the sustainability of the market rebound.
In the short term, global markets still face multiple risks, including the impact of the US election results on taxation, trade, and fiscal policies, Middle East conflicts and oil price shocks. Therefore, by allocating multiple assets, it is more likely to achieve the goal of diversifying risks and achieving more sustainable returns.
Overall, we will maintain a high allocation to stocks and gradually increase it when appropriate, especially US and Japanese stocks. We believe that the chances of a recession are low, and financial conditions are expected to improve with the Fed’s rate cuts, which will be beneficial to risky assets.
In terms of fixed income, long-term bond yields may still rise due to increased bond issuance, wider fiscal deficits, changing market expectations of Fed policy and improved economic growth prospects. Therefore, among the major bond categories, we are more optimistic about global high-yield bonds with shorter duration, emerging market US dollar sovereign bonds and Asian credit.
In addition, we reduce the allocation of inflation-linked bonds (TIPS) to neutral because the upside risk of inflation has eased. In addition, we maintain a high allocation to cash. Although the Fed has begun to relax its policy, the cash yield is still attractive.
(The author is Shen Wenting, multi-asset solutions strategist for Asia Pacific at Pulse)
