by NGOC ANH 28/01/2024, 02:38

Opportunities in a complex world

HSBC recommended top investment themes to capture the most attractive growth and income opportunities in Asia.

The nascent recovery of the global trade cycle will boost Vietnam’s exports.

>> Efficiently harnessing internal resources creates a breakthrough for the economy in 2024

HSBC expects the beginning of Fed rate cuts in June 2024, US soft landing, corporate earnings recovery, and solid Asia growth to improve global risk appetite and investment outlook of equity and bond markets in 2024. For the next six months, HSBC adopts a mild risk-on investment strategy with underweight on cash, mild overweight on US Treasuries and global investment grade bonds and tactical overweight on hedge funds. Within its neutral positioning in global equities, it is overweight on US, EM Asia and Latin American equities. Within Asia ex-Japan equities, it favours structural growth leaders and has mild overweight position in India, Indonesia, and South Korea. It stays neutral on mainland China and Hong Kong equities with focus on service consumption opportunities. It holds a positive view on the US dollar due to support of high real yield, growth differential and safe-haven demand driven by geopolitical uncertainty.

Fed Pivot and Solid Asia Growth

Fan Cheuk Wan, Chief Investment Officer, Asia, Global Private Banking and Wealth, HSBC, said “As we look ahead into 2024, we see two positive drivers supporting global financial markets. Major western central banks have done with rate hikes amid continued disinflation and the US economy is heading for a soft landing. These two positive developments should support recovery of global risk appetite in 2024. Positioning for slower but positive global growth and Fed rate cuts starting in June 2024, putting cash to work in quality bonds, US and Asian equities and alternatives should deliver diverse sources of return and income to optimise portfolio performance and mitigate market volatility.”

“We see quality bonds as the most attractive asset class for H1 2024 ahead of the first Fed rate cut. We focus on locking in still attractive yields via our overweight in US and UK government bonds and investment grade bonds across developed and emerging markets. Although global growth should remain below trend growth in 2024, the US growth engine continues to run, thanks to the resilient US consumer and government stimulus supporting investment and innovation in technology and healthcare. Equity valuations now see better fundamental support from earnings recovery that we anticipate in 2024, which provides potential upside for stocks that can deliver on earnings expectations. We expect the global AI investment boom will extend into 2024, reinforcing our bullish view on the global, US and Asian IT sectors,” notes Fan.

Fan added: “Going against the global headwinds, Asia’s robust private wealth accumulation, resilient middle-class consumers, digital transformation, and green transition offer solid domestic drivers to support healthy economic growth. We forecast Asia ex-Japan GDP to grow 4.5% in 2024, close to double the average global growth of 2.4%, led by India’s 6.0%, Indonesia’s 5.2%, and China’s 4.9% growth this year. We favour those Asian markets with positive cyclical momentum and strong structural growth stories, with India and Indonesia standing out as the most exciting structural growth stories in Asia. Both countries benefit from multiple tailwinds of supply chain diversification, rise of middle-class consumers, strong FDI inflows and young demographics.”

Four Investment Priorities for H1 2024

First, extending bond duration ahead of policy easing. “The Fed has done with rate hikes and markets tend to rally well before the first rate cut. Rate cuts will hurt cash returns but should boost investment outlook for the bond market. We have extended our duration positioning to medium-to-long maturities (7-10 years) for US Treasuries and maintain our medium duration preference (5-7 years) for global investment grade corporate bonds,” says Fan.

Second, broadening US equity exposure to benefit from soft landing. “The US economy should continue to outperform the bearish consensus. High tech valuations are warranted by strong structural growth and high return on equity in high-growth segments such as generative AI & robots and new energy transportation. We expect the US equity rally to broaden beyond technology with support of the soft landing. We look for value in the industrial, healthcare and consumer discretionary sectors through our themes on North American Re-Industrialisation, Healthcare Innovation and American Resilience. We remain positive on the US dollar due to support of high real yield, growth differential and safe haven demand driven by geopolitical tensions,” notes Fan.

Third, hedging tail risks via alternatives, multi-asset, and volatility strategies. “We expect the markets will continue to worry about cyclical, interest rate and geopolitical risks. A core allocation to private markets and multi-asset strategies can add diversification benefits, while nimble hedge funds can take advantage of market volatility. Volatility strategies can help take a directional view on market movements or can be used to generate income to stabilise portfolios’ total returns,” Fan points out.

Fourth, diversifying EM exposure into structural growth leaders. “Slower global and China growth, high USD rates and a strong USD will remain headwinds for EM asset classes, but we see increasing return dispersion due to growth divergence within EM. The relief from easing inflation provides breathing space to the Asian central banks and consumers, allowing policymakers in most Asian economies to end the monetary tightening cycle. We forecast interest rate cuts in Australia, mainland China, Hong Kong, India, Indonesia, South Korea, the Philippines, and Singapore in 2024. Within Asia ex-Japan equities, we favour structural growth leaders and hold overweight position in India, Indonesia and South Korea. We stay neutral on mainland China and Hong Kong equities with more selective positioning on service consumption sectors,” highlights Fan.

“We believe many compelling investment opportunities exist around the world despite the complex investment environment. We have identified five top trends which are reshaping the new world order. By better understanding these long-term structural forces, investors can avoid being blown off the course by short-term market noise,” adds Fan.

Fan highlights the five top trends that will capture the most attractive opportunities in 2024:

First, Asia in the New World Order: Capture compelling growth opportunities from supply chain reorientation, rising wealth and middle-class consumers, digital transformation, and the green transition.

Second, disruptive Technologies: Focus on structural growth winners that benefit from disruptive technological innovation including generative AI and robots, alternative fuels, and the aerospace sector.

Third, climate Action: COP28 has added momentum to the innovation of new green technology and green infrastructure and global investment in sustainable energy. 

Fourth, evolving Society: Focus on structural growth driven by urbanisation, healthcare, and social empowerment.

Fifth, investing Ahead of the First Fed Interest Rate Cut: Opportunities are seen in the resilient US economy, US onshoring, quality credit markets and senior bank bonds.

Vietnam Economic and Investment Outlook 2024

James Cheo, Chief Investment Officer, Southeast Asia and India, Global Private Banking and Wealth, HSBC, highlights Vietnam economy to grow by 6% in 2024. “The strength of Vietnam economy in 2024 will come from a combination of consumer and investment spending. The strong inflows of Foreign Direct Investments will likely continue in 2024 buttressing Vietnam’s manufacturing sector. The nascent recovery of the global trade cycle will boost Vietnam’s exports. Furthermore, Vietnam is likely to witness a gradual uptick in international tourism. All in all, we expect Vietnam economy to grow by 6% GDP growth in 2024, faster than in 2023.” notes Cheo.

>> Vietnam advised to capitalise on domestic market to drive growth

“Inflation is fairly stable but there could be a upside risk from higher-than-expected energy or food prices, we think that Vietnam’s monetary authority will stay vigilant and keep policy rates on hold for this year. We forecast the VND to move towards 24400 against the USD by the end of 2024,” says Cheo.

Q1 2024 High Conviction Themes

HSBC recommends four top investment themes to capture the most attractive growth and income opportunities in Asia.

First, reshaping Asia’s Supply Chain. “We launch this new high conviction theme, as the driving forces of geopolitical tensions, trade fragmentation and technology restrictions are accelerating global supply chain diversification across the region. To mitigate geopolitical risks and alleviate the impact of trade tariffs, western multinational corporates implement the ‘China1 strategy’ by building new production facilities in India and ASEAN to supplement their supply chain in China. This theme focuses on North Asian industry leaders which have successfully diversified their supply chains beyond China to enhance competitive edges. We also identify geared winners in India and ASEAN which gain from strong FDI inflows driven by supply chain reconfiguration,” highlights Cheo. 

Second, rise of India and ASEAN. “We see promising secular growth opportunities in India and ASEAN, riding on the structural tailwinds from strong foreign and domestic private investments, young demographics, the technology boom, and green transformation. India has consistently delivered stronger-than-expected growth in manufacturing and service activities throughout 2023, with strong FDI inflows and booming services exports powering employment, private consumption, and productivity gains. 40% of the world’s Global Capability Centres are located in India, offering a strong boost to the country’s service exports and the job market,” says Cheo.

“Indonesia offers one of the best growth and investment stories in Asia, supported by its large, young and growing population, with rapid urbanisation and robust private consumption being the key growth engine. Indonesia further benefits from upgrading of its manufacturing value chain. The country’s abundant reserves of green minerals and metals are vital inputs for the EV and battery industries. Indonesia holds the world’s largest nickel reserves with an estimated 21m tonnes or 22% of global reserves,” notes Cheo.

Third, future Asian Consumer. “Driven by rising Asia wealth and middle-class consumers, Asia’s consumer discretionary sector stands out as a bright spot, including select Chinese e-commerce leaders, Asian consumer discretionary companies, AI-driven and digital consumption and Asian financial services providers. This high conviction theme focuses on Asia’s consumer discretionary sector which is projected to deliver 16.4% earnings growth in 2024 despite the high comparison base last year,” adds Cheo.

Fourth, capturing Peaking Asian Yields. “We focus on locking in attractive yields from quality Asian bonds. We favour Asian financials, Indian local currency bonds, Indonesian quasi-sovereign IGs, Korean IG bonds, Macau gaming and Chinese TMT credits. The all-in yield of the Asian IG bond index is attractive at around 5.4%, above the 3-year average of 4.5%,” Cheo points out.

“Disinflation is on track in most Asian economies, with inflation now expected to return to central bank target ranges in 2024 in most countries, ahead of most other regions. We believe Asian yields are peaking and expect policy rate cuts in Australia, mainland China, Hong Kong, India, Indonesia, South Korea, the Philippines and Singapore in 2024 to bring policy tailwinds for the Asian bond markets in the coming year,” says Cheo.