In China, the government continued to provide liquidity and support to the market, and earnings downgrades are expected to bottom. However, sentiment remains weak, and investors still await any concrete improvement in the property sector and consumption demand.

Meanwhile, hopes of a rate cut by the US Fed at the March meeting have been dampened following the central bank’s hawkish signals, impacting Asia assets.

Source: J.P. Morgan, MSCI, Morningstar, Data as of 31 January 2024

China / Hong Kong equities

• Hopes of a rate cut by the US Fed at the March meeting have been dampened following the central bank’s hawkish signals. As a result, the market has pushed its first rate cut expectations to May/June. Additionally, the total rate expectation for 2024 has been adjusted to 1.25% from more than 1.5%. With the recent continuous strong job numbers and wage growth, as well as the risk of a resurgence of inflation due to higher shipping costs, we believe the market will continue to adjust its rate-cut expectations. As a result, Treasury yields have continued to move upward. The US equity market is trading close to 24x PE, led by a narrowing breadth of stocks. Some correction is imminent, as signaled by the small-cap segment.
• In China, the government continues to provide liquidity and support to the market, with the national team continuously pouring money into A-share ETFs. There are also multiple signals that Beijing intends to stabilize the capital market. The surprise RRR cut, effective 5 February, was the first step. Earnings downgrades are bottoming, with foreign outflows coming closer to an end. However, sentiment will only be solidly lifted with concrete details of the policy.
• With lower yields, the liquidity situation in Hong Kong has improved. However, its economic situation remains weak.

China A-shares

• There is a strong rebound in the A-share market after hitting its 5-year bottom with strong buying from a sovereign wealth fund via the Northbound connect. Year-to-date flows to A-shares have turned positive from negative. We believe the A-share market is bottoming with the support from Beijing.
• However, sentiment remains weak, and investors will only return when they see improvement in the property sector and consumption demand. Corporate earnings are also bottoming. Those with upside earnings surprises had big movements as expectations were already at extreme bearish levels.

Asia ex-Japan equities

• As the market adjusts its Fed rate cut expectations, Treasury yields have increased, and the US dollar has become stronger.
• Earnings momentum in ex-China markets continues to be strong. India is also on a structural growth cycle, given the country’s strong macro environment and solid budget with a big infrastructure push. Other markets are taking a pause as valuations are getting higher.

Emerging market ex-Asia equities

• As the US will likely avoid a recession, on the back of its strong economic data and job market, emerging markets will continue to grow, together with their own improving domestic economies. However, valuations are also a bit stretched.

Japanese equities

• Following the BOJ meeting in January, expectations of ending the negative interest rate policy and yield curve control are pushed to April or July. Wage reform continues with more and more companies increasing wages. As wage inflation will likely become a sustainable trend, the BOJ will continue to face pressure to adjust its monetary policy.
• On the other hand, earnings growth remains strong, with more companies beating estimates with upside guidance, and corporate governance reforms continue to progress well.

Asia investment grade bonds

• Asia investment grade bonds continued to attract inflows due to their attractive yield levels and negative net issuance. Credit spreads remain stable at already tight levels.
• However, as the market was overly optimistic about interest rate cuts, there will be a continuous correction in yields as the market needs to continue to adjust its overly dovish expectations.

Asia high yield bonds

• Activities in Asian high yield bonds have become more active as spreads continue to stay above average, and the impacts arising from the Chinese property sector have diminished. There are signs of some high yield issuers coming back to the market after a very long pause, which is a healthy development for the Asian high yield market.
• However, as the market was overly optimistic about interest rate cuts, there will be a continuous correction in yields as the market needs to continue to adjust its overly dovish expectations.

Emerging market debt

• Spreads have become even tighter. However, demand remains strong. With a soft landing backdrop in the US, emerging markets are expected to deliver stronger growth as fundamentals in EM bonds continue to improve.
• However, as the market was overly optimistic about interest rate cuts, there will be a continuous correction in yields as the market needs to continue to adjust its overly dovish expectations.

Gold

• Gold prices corrected after breaking their historical high, given strong hopes of rate cuts this year. As mentioned, the rally was relatively excessive, and given the still high interest rates in absolute terms, some correction was imminent.
• With some stabilization signs in the Middle East and the Red Sea, gold will continue to face some pressure. However, the asset class remains a good geopolitical hedge in the medium to long term.

Multi-asset

• A multi-asset strategy offers lower volatility compared to traditional single-asset or balanced portfolios. However, the correlation between risk assets, such as equities, credits, and commodities, has recently increased dramatically. In an uncertain environment with low yields, income becomes an essential source of return for investors.

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^{The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All materials have been obtained from sources believed to be reliable as of the date of presentation, but their accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.}

^{Investors should note that investment involves risk. The price of units may go down as well as up and past performance is not indicative of future results. Investors should read the explanatory memorandum for details and risk factors in particular those associated with investment in emerging markets. Investors should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you.}

^{This article has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited.}