Analysts bullish on yen, US stocks, Reits and semiconductor plays as interest rates normalise

MACROECONOMIC uncertainty, lower risk-free rates and artificial intelligence (AI) are among the big investment themes for 2024.

Beneficiaries of these themes would include the Japanese yen, US-listed stocks, real estate investment trusts (Reits) and semiconductor companies, analysts and market strategists said.

The Federal Reserve might have lifted the overhang of higher interest rates at its December meeting, when it flagged interest rate cuts in 2024, but the economic climate remains cloudy.

A soft landing – disinflation without a recession – is the base case at State Street Global Advisors (SSGA). Even so, the asset manager expects economic uncertainty in 2024. It advised investors to remain cautious as earlier increases in interest rates continue to work their way through the system.

Consumer demand could also slow, because household savings that were built up during the pandemic have now been depleted, said investment manager M&G.

In times of slower growth, investors tend to flock to safe havens. Jim Leaviss, chief investment officer for fixed income at M&G, said the Japanese yen is one such asset.

“The potential for an inflection point in the yen means that it will be important to pay close attention to developments in Japan in 2024,” he said.

As interest rates rise, investors should also move more of their money out of cash. Investment manager Nuveen said “sitting in cash may result in missed opportunities”.

Meanwhile, UOB Asset Management said: “It is time to get back to normal investing.” It expects both stocks and bonds to do well, driven by improved earnings and a peaking of interest rates.

SSGA, however, prefers fixed income to equities, as rate cuts should lift the prices of bonds. Sovereign fixed income, specifically US Treasuries, are an “attractive” proposition over the medium term, it said.

Equities, on the other hand, have already rallied and might face greater headwinds in 2024.

“A more cautious and price-conscious consumer has negative implications for corporate earnings,” said Altaf Kassam, SSGA’s head of investment strategy and research for Europe, Middle East and Africa.

“Investors need to be especially cognisant of the risks to the asset class from elevated real interest rates, a slowing money supply and sluggish economic growth expected in 2024.”

SSGA nevertheless sees some positives for stocks listed in the US and Japan.

US companies typically have a competitive advantage, while Japan should do well because of improving corporate governance and capital efficiency. The asset manager noted increased share buyback activity in Japan, which it expects to be supported by high cash reserves.

Equity markets that were punished in 2023, including the emerging markets, are set up well for 2024, Nuveen said.

Abrdn is bullish on equity markets with high exposure to technology stocks, such as South Korea and Taiwan, as well as Reits. These market segments are likely to do well when risk-free rates drop, the UK-based asset manager said.

Tan De Jun, portfolio manager of the research and portfolio management team at FSMOne.com, said the semiconductor industry is at a turning point thanks to the rapid adoption of AI.

“Aside from the structural megatrends such as AI and the continuing digitalisation of the global economy, governments across the world are also handing out huge incentives to build fabs, adding to the total supply of semiconductors in the years to come,” he said.

Global semiconductor capacity is expected to increase by 6.4 per cent in 2024, to over 30 million wafers per month (wpm), industry body Semi said in its World Fab Forecast on Tuesday (Jan 2).

This would be a new record in capacity. Last year, capacity rose 5.5 per cent to 29.6 million wpm. From 2022 to 2024, 82 new fabs or semiconductor manufacturing plants are expected to be built.

Asia stands to be the largest beneficiary of a new semiconductor cycle, given that it accounts for more than half of the world’s semiconductor output in terms of value added, Deutsche Bank Research noted.

“Taiwan, Malaysia, Singapore and (South) Korea are the largest net exporters of semiconductors,” said the German research company. “Malaysia stands out as the one with big potential upside.”

M&G also favours long-term structural themes – such as innovation (including AI), infrastructure, and a low-carbon economy – as it believes these will continue to be supported by long-term capital, independent of near-term volatility.