DESPITE a global slow-growth environment, increasing economic uncertainties and diverging economies, stocks and bonds in many major markets surged at the end of 2023, as market participants speculated that rate cuts would happen sooner rather than later this year.
However, inflation has not yet returned to levels that would allow central bankers to declare that their mission is done.
Even though rate hikes are over in most major economies, cuts are unlikely to happen within the next few months; mid-2024 onwards is a more realistic timeline.
On the equities front, investors are seeking resilient, “quality” companies with pricing power, strong balance sheets and durable competitive advantages.
Valuations in markets outside the US remain reasonable, making them attractive based on long-term value indicators. Investors may also capitalise on fixed-income opportunities while monitoring the US dollar’s performance.
Meanwhile, market volatility is also driving interest in alternative assets to help diversify portfolios.
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Shares of listed private-equity investment companies are currently trading at substantial discounts to their underlying assets, offering potential value, based on our long-term outlook.
Asia holds twice the potential
Asia holds significant potential for long-term investors due to a growth desynchronisation.
The region is expected to outperform the US once the Fed pauses and starts cutting rates, driven by slowing growth and moderating inflation.
Asia also has stronger earnings resilience; earnings for 2024 are expected to grow at twice the rate of those in the US.
Consequently, investors are likely to find Asia rewarding due to its robust earnings growth and lower downgrade risks.
Key markets such as Korea, Taiwan, India and Japan are expected to be the main performers in the region.
For China, current valuations appear attractive, and macro indicators show that targeted policy support is yielding positive results.
A recovery in consumption services has commenced, with the potential to broaden out as consumers normalise their savings rate.
A re-stocking cycle is also in progress, which is expected to gain momentum in the coming months. These developments could restore both corporate and consumer confidence, potentially leading to a sharp rebound.
We remain positive on companies that can adapt to changing regulatory frameworks and align with Chinese policy objectives, particularly in areas such as digital innovation, green technology, affordable healthcare and improving livelihoods.
Focus on income, sustainability and Asia opportunities
Alongside Asia, we expect investments in high-quality fixed income and sustainability to deliver value.
In the fixed-income space, we are eyeing the impending interest-rate pivot and prefer high-quality bonds – particularly debt issued by some of the world’s stronger banks – over riskier alternatives.
We are also positive on duration, via global government bonds, credit and emerging market (EM) local currency debt.
We retain an overweight on investment-grade debt, as it offers a more appealing approach to corporate risk than equities.
On EM local debt, initial rate cuts by some EM central banks should broaden into a pan-EM rate-cutting cycle by the middle of this year, and certain distressed markets may offer a particularly attractive yield pickup.
In terms of sustainable investing, investors need to look beyond decarbonisation.
Social issues linked to the climate transition, a bigger focus on nature and the growing need for adaptation measures to tackle climate-related physical risks receive more attention from regulators.
The impact of climate change remains a key consideration for investors.
The world is changing, and we need to finance the transition. Investing in companies that are part of this change is vital because transition – when realised – creates alpha.
As for opportunities in Asia, we see India and Japan as two bright spots.
The Indian economy is at the initial phase of a cyclical upturn, positioning it as one of the fastest-growing countries on a global scale. Driven by significant reforms over the last decade, the Indian bond market has delivered substantial outperformance versus a wide range of asset classes.
The outlook remains bright, and this is an opportune time for investors to position themselves in the market.
In Japan, compelling top-down and bottom-up factors are driving the equities market. Japanese companies prioritise profitability and capital return. The Tokyo Stock Exchange’s efforts to enhance corporate profitability and governance have accelerated corporate restructuring, dividend payouts and stock buybacks, which are all contributing to a positive outlook.
Although the weakening economic resilience of the US suggests a mild recession from the middle of the year, there is a growing possibility that the Fed will achieve a “soft landing” by controlling inflation, without triggering a recession.
Considering the potential easing cycle ahead, we hold a far more optimistic outlook for 2024, when we expect the rate easing cycle will encourage investors to return to the markets.
The writer is chief executive officer of investments, abrdn
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