Opportunities in a Rate Cut Cycle: Equities more Favourable than Cash

US election, JPY uncertainties may spur increased volatility; stay vigilant about market developments
Equity investing offers more advantages than holding onto cash in reflationary cycle
Stay positive on US, Asian quality tech shares; seek bargain-hunting opportunities
Lift our stance on China to relatively neutral following launch of supportive measures; remain cautious on Japanese equities due to yen volatility and murky monetary policy trajectory

Expect volatility leading up to the US election

In a reflationary cycle, a reduction in interest rates is conducive to shoring up the economy, coupled with higher equities risk premium could help bolster long-term equity valuation, leading us to favour equities over cash. However, in the near-term, an easing global growth trajectory, a U-turn in rates, and uncertainties surrounding the US election are expected to trigger market volatility. With several speed bumps in sight, we are shifting to a slightly more cautious stance towards the broader market for the time being. Following the FOMC meeting in September, the Fed delivered a jumbo rate cut of 50 basis points. Going forward, we believe the key factor driving interest rates will be the labour market, which, along with the broader US economy, has been exhibiting resilience. This strengthens our view that a hard landing is unlikely, prompting us to uphold our constructive stance on US equities. As for Asia, we continue to favour the region's technology sector while adopting a more neutral stance on China after the country launches a spate of significant economic support measures. Meanwhile, we are taking a conservative approach towards Japan, given yen volatility and the country's unclear monetary policy outlook.

AI enhances business efficiency and valuations: Target US and Asian tech stock opportunities

The normalisation of the US labour market and rising wages contribute to a disinflationary trend. With US consumer prices steadily easing, current real interest rates seem too high. All these factors combined present a strong case for the Fed to start loosening its monetary policy in September. Rate cuts could spur consumption and corporate spending, and many listed companies reported solid results in the latest earnings season. These favourable factors support our positive outlook on US equities, particularly for leaders in the AI and technology sectors. Given the substantial gains in tech stocks this year, some corrections are expected. Volatility is likely to increase as the US election approaches, and any market dips could present buying opportunities for us.

AI applications are burgeoning, bringing transformative impacts to sectors such as retail, healthcare and financials. Companies that effectively utilise AI to enhance operational efficiencies may experience stronger earnings and higher valuations. The growing prominence of AI significantly influence our positive outlook for the sector, as increasing demand benefits companies throughout the supply chain. AI computing requires massive use of data, leading to a rising need for data centres, semiconductors and power grids. Many of these firms are based in the US and Asia, including South Korean and Taiwanese chipmakers, as well as manufacturers in Japan and Australia. Moreover, the growing appetite for AI infrastructure is expected to boost industrial stocks in emerging countries. For instance, India has initiated several AI infrastructure projects, including the construction of a supercomputer comprising 10,000 GPUs and a semiconductor factory by a major conglomerate . The expanding middleclass, growing workforce, and surging infrastructure spending further reinforce our optimistic outlook on Indian stocks, particularly those with potential for structural growth.

Turning relatively neutral on China after launch of stimulus package; Cautious on Japan due to yen volatility, murky monetary policy direction

In late September, China announced a slew of economic support measures, including lowering policy and mortgage rates as well as reserve requirement ratios. The move is a positive surprise to investors, interpreting it as a shift in Beijing's acknowledgement that more active and comprehensive monetary and fiscal policies are needed to revive the economy. We expect the medium-term outlook for Chinese equities will hinge on the extent of fiscal stimulus to be announced during the Politburo and NPC Standing Committee meetings in late October to early November. In view of the fresh measures, we lift our stance towards China to slightly neutral. We continue to favour dividend and value plays, including oil and gas shares. With interest rates having peaked, companies that pay stable dividends are considered relatively defensive. An added benefit of energy stocks is that the sector provides a hedge against elevating geopolitical risks.

In July, the Bank of Japan raised interest rates, triggering the unwinding of Japanese yen carry trades and rattling markets. The yen later restored its calm but has recently resumed its depreciating trend after the country's new Prime Minister Shigeru Ishiba expressed flip-flopping views on Japan's monetary policy. Ishiba, who is known for his hawkish monetary policy stance, earlier indicated that Japan's economy is not ready for another rate hike and urged the central bank not to raise rates further, but he later backtracked on his remarks. The murky outlook of the Japanese central bank's policy and volatility in the yen overshadow the country's sound economic conditions, as Japan recorded solid economic growth in the second quarter, marked by accelerating capital expenditure . This leads to our slightly underweight view on Japanese stocks.

Taking a more cautious view towards the broader market for now; bracing for possible short-term volatility

We believe that declining rates could stimulate personal consumption and business investments, subsequently spurring corporate growth and boosting investor sentiment. These favourable factors, combined with the expanding use of AI, are conducive to long-term equity valuations. However, as we brace ourselves for possible short-term volatility prompted by uncertainties such as the US election, a flattening global growth path, and fluctuations in the Japanese yen, our teams are becoming slightly cautious towards the broader market for the time being.