Eastspring Investments
5 min read
Summary
Global growth is likely to decelerate over the following months as the lagged effects of rate hikes kick in. Markets, however, seem to be pricing in a more optimistic scenario, buoyed by better-than-expected US economic data. Nonetheless financial markets will experience higher volatility this year as investor sentiment will continue to be affected by rising political risks, social instability and election outcomes.
Market update
Equities: Global equities continued to rise in February, supported by resilient earnings, most notably, from several of the ‘Magnificent Seven’ stocks and Chinese equities. As US inflation came in stronger-than-expected, the US 10-Year Treasury yield rose over the month from under 4% to end closer to 4.3%-month end. Against a backdrop of rising US yields, US stocks still outperformed, with five of the ‘Magnificent Seven’ meeting or exceeding earnings expectations. Asia ex Japan equities posted positive returns, supported by the snapback in China equities. Signs of improving macro data and news of various support measures - including a cut to the five-year loan prime rate (i.e., key mortgage reference rate), and restrictions on short selling (and securities lending) by China’s securities regulator - buoyed the Chinese market over this period.
Fixed Income: Government bonds were generally under pressure in February, amid markets scaling back expectations of Fed rate cuts in 2024. Yields on 2-year, 5-year and 10-year US Treasury notes climbed by 41bps, 41bps and 34bps to 4.62%, 4.24% and 4.25% respectively. The Bloomberg Barclays Global Aggregate Index was down -1.26% amid higher yields. The US high yield market (proxied by ICE BofA U.S. High Yield Constrained Index) posted 0.30% while the Asian credit market (proxied by J.P. Morgan Asia Credit Index) returned 0.09%.
Macro overview
Growth: Global growth is likely to decelerate over the following months due to the lagged impact of aggressive monetary tightening. While the probability for a soft landing has increased, supported by the recent slew of better-than-expected US economic data, market participants appear to be pricing in a more optimistic scenario. Nonetheless, on a 12-month view, our base case is that a global recession remains possible (albeit a shallow one in magnitude), led by the Developed Markets as the lagged effects of rate hikes start to impact growth.
Inflation: US CPI data continued to run hotter-than-expected in February. While “stickier” inflation and still resilient US growth may delay the Fed’s pivot, we believe the disinflationary trend will continue to play out over the medium term. This is likely to be the case as the US labour market demand starts to cool (i.e., wage inflation is moderating) and US consumption starts to run out of steam (i.e., excess savings is depleting).
Monetary Policy: Developed Markets’ central banks are already at the end of their respective rate-hiking cycles. After holding its key rate steady in January for the fourth straight meeting, there is a 99% probability the Fed will again hold the policy rate steady at the upcoming March 2024 meeting. We believe the Fed will remain cautious and continue to walk a fine line between proactively loosening its policy (potentially risk restoking inflation) and remaining too restrictive (further contributing to a growth slowdown). The data to watch for is wage growth. This needs to come down enough to lower overall core inflation towards the Fed’s target to compel the Fed to pivot to rate cuts.
Asset class views
Source: Asset class views are as of the investment team’s most recent meeting in early March 2024, and should not be taken as a recommendation. The information provided herein is subject to change at the discretion of the Investment Manager without prior notice. 3m = 3-month view. 12m = 12-month view.
Please download report for a discussion on key risks.
Singapore by Eastspring Investments (Singapore) Limited (UEN: 199407631H)
Australia (for wholesale clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore, is exempt from the requirement to hold an Australian financial services licence and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Australian laws
Hong Kong by Eastspring Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.
Indonesia by PT Eastspring Investments Indonesia, an investment manager that is licensed, registered and supervised by the Indonesia Financial Services Authority (OJK).
Malaysia by Eastspring Investments Berhad (200001028634/ 531241-U) and Eastspring Al-Wara’ Investments Berhad (200901017585 / 860682-K).
Thailand by Eastspring Asset Management (Thailand) Co., Ltd.
United States of America (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is registered with the U.S Securities and Exchange Commission as a registered investment adviser.
European Economic Area (for professional clients only) and Switzerland (for qualified investors only) by Eastspring Investments (Luxembourg) S.A., 26, Boulevard Royal, 2449 Luxembourg, Grand-Duchy of Luxembourg, registered with the Registre de Commerce et des Sociétés (Luxembourg), Register No B 173737.
Chile (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Chilean laws.
The afore-mentioned entities are hereinafter collectively referred to as Eastspring Investments.
The views and opinions contained herein are those of the author, and may not necessarily represent views expressed or reflected in other Eastspring Investments’ communications. This document is solely for information purposes and does not have any regard to the specific investment objective, financial situation and/or particular needs of any specific persons who may receive this document. This document is not intended as an offer, a solicitation of offer or a recommendation, to deal in shares of securities or any financial instruments. It may not be published, circulated, reproduced or distributed without the prior written consent of Eastspring Investments. Reliance upon information in this document is at the sole discretion of the reader. Please carefully study the related information and/or consult your own professional adviser before investing.
Investment involves risks. Past performance of and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the funds managed by Eastspring Investments.
Information herein is believed to be reliable at time of publication. Data from third party sources may have been used in the preparation of this material and Eastspring Investments has not independently verified, validated or audited such data. Where lawfully permitted, Eastspring Investments does not warrant its completeness or accuracy and is not responsible for error of facts or opinion nor shall be liable for damages arising out of any person’s reliance upon this information. Any opinion or estimate contained in this document may subject to change without notice.
Eastspring Investments companies (excluding joint venture companies) are ultimately wholly owned/indirect subsidiaries of Prudential plc of the United Kingdom. Eastspring Investments companies (including joint venture companies) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or with the Prudential Assurance Company Limited, a subsidiary of M&G plc (a company incorporated in the United Kingdom).