Despite global equity market’s historical high allocations to US equities, the elevated Treasury yields, as the market prices out the probability of rate cuts due to strong economic data, have created cautious sentiment in the market. Particularly, the Hong Kong market remains weak due to higher interest rates and the weaker RMB has pressured Chinese stocks listed in Hong Kong. In contrast, China’s government has initiated measures to bolster domestic consumption, yet the low government bond yields suggest ongoing economic slowdown.

Sentiment across Asia remains subdued, with Asian currencies hitting two-decade lows. The strong USD and high Treasury yields continue to dominate the market, putting pressure particularly on Southeast Asian countries.

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

China / Hong Kong equities

• Global allocation to US equities has reached historical highs despite elevated valuations. Treasury yields have surged to their highest levels since November 2023, as the market is pricing out the probability of rate cut this year amid concerns of higher inflation. Strong employment and economic data and a large issuance of Treasuries in January have contributed to these elevated yields.
• As a result, the Hong Kong market has remained weak due to higher interest rates. Additionally, the weaker RMB has pressured Chinese stocks listed in Hong Kong. The Biden administration’s decision to add more companies to the Department of Defense (DoD) list and the entity list has further contributed to the cautious sentiment. However, this impact is expected to be short-lived as the market will shift its focus to Trump’s policies as the inauguration approaches.

China A-shares

• The government has signaled its support for domestic consumption by increasing subsidies on home appliances and consumer electronics and raising wages for government workers. Economic activities in China have gradually picked up in recent months, but historically low government bond yields indicate a concerning likelihood of a prolonged economic slowdown. Nevertheless, we can expect some positive momentum in the A-shares market as the Chinese New Year approaches.

Asia ex-Japan equities

• Sentiment across Asia remains subdued, with Asian currencies hitting two-decade lows. The strong USD and high Treasury yields continue to dominate the market, putting pressure on Southeast Asian countries. These nations are unable to lower interest rates to protect their currencies, and the strong dollar is creating funding challenges, particularly for countries with twin deficits like the Philippines. While political risks in Korea persist, their impact on the market gradually diminishes. Taiwan’s market tracks closely to the US tech sector. However, tariff concerns may dampen sentiment, and valuations are being stretched.

Emerging market ex-Asia equities

• Geopolitical risks remain highly uncertain despite a temporary de-escalation in the Middle East. OPEC+ has decided to increase production hike, and Europe’s inability to secure natural gas through Ukraine is supporting energy prices in the near term. However, the strong USD and high Treasury yields are significant challenges for the region.

Japanese Equities

• After the Bank of Japan (BOJ) maintained its current stance during the December meeting, the market now expects the BOJ to adopt a cautious approach to raising interest rates due to the uncertain global macro environment. The weakening JPY has benefited exporters. Additionally, company earnings remain healthy, and there are indications that the GPIF may increase its allocation to Japanese equities.

Asia investment grade bonds

• Elevated US Treasury yields, driven by the market pricing out the probability of rate cuts and strong economic data, continue negatively affecting long-duration investment grade bonds. The momentum in pushing US long-end yields closer to the 5% level is apparent. Spreads for Asian investment-grade bonds remain tight, while demand is robust, with active new issuances since the new year.

Asia high yield bonds

• The strong USD may begin to exert some funding pressure on several Southeast Asian countries, necessitating close monitoring. Spreads for Asian high-yield bonds remain tight, but new issuances have been nearly absent. Following a rally in 2024, this year, Asian high-yield investments will require a more selective approach as the global macro environment becomes more uncertain.

Emerging market debt

• Spreads have been at tight levels below historical averages. With increasing uncertainties in the market, the outlook for emerging market bonds remains volatile. The upward shift of US yield curve and rising Brazil CDS are also alarming concerns to EM bonds.

Gold

• Gold prices will likely remain range-bound in the near term after surpassing their historical high last year. The strong USD and high US Treasury yields are the main factors limiting gold’s potential upside. However, central banks continue to buy gold for their reserves to reduce dependence on the USD.
• In the longer term, heightened geopolitical risks will likely support the outlook for gold. Additionally, the trend toward de-dollarization raises investors’ concerns about the diminishing role of the USD as the global trade currency.

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, credit, and commodities—has recently increased significantly. In this uncertain environment, income becomes a crucial source of return for investors.

Know more about Value Partners Asian Income Fund

^{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.}

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