The expected rate cuts in the US will continue to benefit Hong Kong equities, as a large part of the territory’s sectors are interest-rate sensitive, including property, REITs, telecom, and utilities. However, investor sentiment toward Chinese equities remains lukewarm, given the country’s weak economic outlook.

Southeast Asia will also benefit from the Fed rate cuts, and the region’s good earnings momentum has supported its equity performance. However, the rally’s momentum is diminishing amid the increasing volatility in the US market and its softer economic data.

Meanwhile, investors have dialed back on their optimistic outlook on AI themes. We expect markets to continue to adjust their expectations in this space.

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

China / Hong Kong equities

• Volatility in the US market continues to remain high, given the uncertainty surrounding the presidential election. In addition, the most recent data indicate the economy is getting softer. Although an economic slowdown is evident in the US, the market has not priced in recession risks. With the August month-on-month core CPI slightly higher than expected, driven by the still elevated shelter prices, the market has dialed back its rate cut expectations to a 25bp cut in September from 50bps. However, market expectations are still aggressive on future rate cuts this year and in 2025.
• Hong Kong equities will continue to be well supported by rate cut expectations, as a large part of HK sectors are interest rate-sensitive, such as property, REITs, telecom, and utilities.
• On the other hand, sentiment toward China equities remains muted. Although company earnings are finding their bottom, there is still no sign of any recovery, given the country’s weak economic outlook.

China A-shares

• The risk premium of China A-shares has reached one of the highest levels as weak economic data in consumption, property, and even the infrastructure industry continue to weigh on market sentiment. There are rumors about a policy move to lower existing mortgage rates. However, the market finds it difficult to regain momentum without more concrete policy details.

Asia ex-Japan equities

• The lower US dollar due to the aggressive Fed rate cut expectations has caused Asian currencies to strengthen, especially in Southeast Asia. As the region is expected to benefit from the Fed’s rate cut, Southeast Asian equities have significantly improved. Good earnings momentum has also supported the region’s equity performance. However, the market rally’s momentum is diminishing amid the increasing volatility in the US market and its softer economic data, which would put pressure on the region.
• Meanwhile, investors have dialed back on their optimistic outlook on artificial intelligence (AI) themes, given the heightened scrutiny toward AI-related investments and the sales delay of the new AI chips. As a result, the Korea and Taiwan markets corrected, following the correction in the US semiconductor sector, to a more reasonable valuation level. We expect markets to continue to adjust their expectations in this space.

Emerging market ex-Asia equities

• With China’s economy remaining soft and the US slowing down, commodity prices have corrected significantly, particularly oil.  The upcoming US presidential election may have significant implications for emerging markets in Latin America and Eastern Europe. The heightened geopolitical tensions in the Middle East remain a risk. On the other hand, the expected faster rate cuts in the US will help support the market.

Japanese equities

• Although the immediate unwinding of the yen carry trade has come to a pause, the longer-term unwind has not ended, as the Japanese yen will continue on its uptrend, given the BOJ’s continued moves to normalize monetary policy and expectations of an aggressive rate cut in the US.
• With investors dialing back their optimistic outlook of the AI theme, the semiconductor sector in Japan dragged due to the stronger Japanese yen and the sector’s less certain outlook. Also, with inbound tourism slowing down due to the stronger currency, inbound-related sectors have also dragged.
• On the other hand, corporate reforms continue to make good progress, with companies strengthening ROEs by increasing share buybacks.

Asia investment grade bonds

• The downward shift of the US yield curve and a weaker sentiment helped spur inflows into investment grade bonds. As the market prices in an aggressive rate cut by the Fed, investors are moving to longer duration investment grade bonds. However, as yields have moved too fast, the market will need to re-adjust its expectations, depending on the upcoming data.

Asia high yield bonds

• Spreads have been at tight levels below historical averages. The upside on Asian high yield bonds has narrowed. While there is no immediate downside, volatility may rise with weaker market sentiment. However, as absolute yields are going down fast due to rate cut expectations, some investors are moving down the credit curve to maintain the higher yield.

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. Also, the heightened geopolitical risks will continue to weigh on the market.

Gold

• Gold prices will go through a consolidation phase after breaking their historical high. With lower yields and a weaker US dollar, the outlook remains positive for gold. The asset class also remains a good geopolitical hedge in the medium to long term.
• In addition to geopolitical worries, investors are concerned about the de-dollarization trend, which will likely continue to support gold prices.

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.

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.}

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