Summary
Global equity markets have sold off on US recession fears. Our base case is still a soft-landing scenario as the Fed has significant room to cut rates to cushion a deeper than expected slowdown. That said, we expect heightened market volatility for the rest of the year.
The main trigger for the current market sell offs is the weak US jobs data. July data showed that the number of jobs added were significantly lower than expected and the unemployment rate rose to 4.3%, the highest since October 2021. The latest data is heightening concerns that the US Federal Reserve (Fed) may be behind the curve.
The Multi Asset Portfolio Solutions Team still expects a soft-landing scenario given that the Fed has significant room to cut rates and cushion a deeper recession. If the Fed appears to be late in its action, a deeper slowdown may emerge, despite healthy consumer and corporate balance sheets. To this end, US labour market conditions and the US wages trajectory continue to be the team’s key watchpoints.
Against this backdrop, Nupur Gupta, Portfolio Manager (Multi Asset Portfolio Solutions Team) believes that the disinflationary forces in the US should keep pushing yields lower. As such the team is adding higher quality, longer duration bonds in their multi asset portfolios to lock in the current attractive yields. The path for global equities, however, depends on whether the Fed is seen to respond proactively or not.
Over in Asia, the Japan market has borne the brunt of the sell offs. Others such as Taiwan, Korea, Singapore are also under heavy selling pressure as investors seek to reduce risk assets. According to Ivailo Dikov, Head of Japan Equity Team, the current market movements are consistent with the sudden shift in global investors’ risk appetite following renewed US recession fears.
While Bank of Japan’s (BOJ) hawkish policy move last week may partially have contributed to the shift in investors’ risk preference, the sell offs might also be exaggerated by global investors unwinding their popular carry trade – borrowing cheap in Yen to invest in risk assets in Japan and globally.
The Japan team will continue to focus on the sustainable trend earnings of companies and the impact of BOJ’s monetary policy normalisation on the valuation of their investee companies. Should the current sell offs provide opportunities with a sizeable margin of safety based on through-cycle sustainable earnings, the team will look to capitalise on this.
There are several structural tailwinds such as reshoring, corporate reforms, real wage growth, and the capex cycle that will continue to support the Japanese equity market in the medium and long term.
Meanwhile for bottom-up value investors, Sundeep Bihani, Lead Portfolio Manager (Regional Asia Equity strategies) and Navin Hingorani, Portfolio Manager (Global Emerging Markets focus team), the current market sell offs are presenting more opportunities. Even before the current sell offs, Asian and EM equities were attractively valued versus the US market. As the Fed starts its rate cutting cycle, we are likely to see the US dollar weaken, and this is usually favourable for Asian and EM assets.
In the Asian local bond markets, the movements have been more contained. Rong Ren Goh, Portfolio Manager (Fixed Income team) points out that in the past we would have seen greater currency depreciation and yield spikes as foreign investors exit some of the riskier local bond markets. Since the Global Financial Crisis, the Asian local bond markets have become more developed and there is higher onshore ownership. Many Asia local bonds no longer behave like an “EM credit.” For now, the team is retaining a quality bias in all their bond portfolios.
Further market volatility should not be ruled out over the next 3-to-12-month horizon in the lead up to the US presidential election and beyond. Equally, rising geopolitical tensions i.e. a broadening of the Middle East conflict may cause further energy inflation and potentially increase global trade costs in the event of supply disruptions. Investors will need to be nimble in their views and positioning. Diversification and risk management remain key to navigating volatile markets.
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