In the 1H23, Global markets were traded at a range-bound. At the end of the first quarter, the market was first dragged by the banking crisis but managed to rebound as the market expected the end of a rate hike coupled with a better-than-expected economic outlook. However, the stock market remains highly volatile and undirectional, due to the disappointing China economic data.
Is it possible for the U.S. to have a soft landing? Is the high-interest rate going to trigger other crises? Are the policies implemented by the PRC government bringing any investment opportunities?
Under this backdrop, we would recommend the “LIKE” strategy for the rest of 2023:
L – Large-cap growth stocks offer better defensive quality
I – Capitalize on higher yields of Investment grade bonds
KE – Diversify across Key Eastern Countries
Kevin Tai, Head of International Wealth Management at KGI Asia, says: “The U.S. rate hike cycle may soon come to an end, economic performance is expected to be the next market focus. Based on the fact that market uncertainty remains, we would recommend keeping your portfolio diversified with allocation on both stocks and bonds. In terms of stocks, we suggest large-cap stocks that can potentially provide higher value to investors. For Fixed Income Investment, we prioritize investment-grade bonds. Here, KGI Asia proposes a strategy called “LIKE”. ”
Global Macro and the U.S.
The U.S. is in the late stage of economic expansion, evident in a low unemployment rate and high inflation. Despite tight monetary policy, we expect the country to avoid a recession in 2H23, due to a strong private sector balance sheet. With minimal reliance on residential investments and debt ratios for households and enterprises at the lowest levels in decades, the U.S. economy has been resilient to a high-interest rate in terms of consumption and investments, especially as 96% of nationwide mortgages are subject to fixed-interest rates.
The U.S. stock performance has been better than expected in 1H23, boosted by the country’s economic resilience and stock rerating within the tech sector, driven by the launch of generative AI. We expect the U.S. stock market to be shored up by near-term positives, including the easing of the bank liquidity crisis, the tech sector rerating, and improving corporate earnings.
Easing recession concerns and the AI frenzy have helped maintain stock rallies year-to-date, but that doesn’t mean that macroeconomic risks have abated. The recession may have been postponed, likely to 1H24, rather than avoided entirely. The U.S. economic resilience means the Fed will have no choice but to keep interest rates high, and tightening policy will eventually lead to deterioration of the labor market, which would hurt consumption and investment. High valuations, a tight monetary environment, and potential economic recession are detrimental to the stock market over the long run. Historically, new structural trends strong enough to propel large tech firms, such as the launch of generative AI, may have led to near-term buying frenzies within stock markets, but they have rarely altered the course of economic cycles or made markets immune to economic
downcycles. As such, investors should stay alert to short-term risks facing large tech firms following recent gains. We believe it would be prudent to gradually switch to defensive stocks during the market rally.
In terms of bond investments, we expect the Fed to pause rate hikes in June or July as inflation has declined from the peak and banks are already tightening lending standards. That said, we expect inflation to remain far above the Fed’s target at the end of this year, and therefore maintain the rate at a high rate. Against such a backdrop, we suggest that investors consider accumulating Treasury bonds in the period between the pause of rate hikes and the start of rate cuts. Additionally, investors should expand their positions in medium- and long-term Treasury notes and investment-grade corporate bonds with higher ratings whenever the Fed issues tightening guidance. Finally, we advise investors to steer clear of high-yield and emerging-market bonds.
James Chu, Chairman at KGI Investment Advisory, says: “With subsiding recession fears, the U.S. stock market has managed to beat expectations so far this year. Near-term catalysts include an apparent end to the bank liquidity crisis, a tech re-rating on the back of generative AI, and improving corporate earnings. However, we caution that macroeconomic risks still linger and expect that a recession, though later than originally forecast, will occur in 1H24F. Also, current economic resilience means that the U.S. Fed will be compelled to maintain higher interest rates. At the end of the day, a tight monetary policy will put a burden on the job market and bear consequences for consumption and investment. We recommend a gradual shift to a defensive stance later this year.”
Mainland China and Hong Kong
Market forecasts could be overly optimistic
The Chinese economy has shaken off last year’s growth woes, recovery is in full swing, and 1Q’s GDP growth rate has set a good start for the economy to return to normal for the whole year, by which GDP growth in 2023 could exceed the 5% target established at the Two Sessions. Nevertheless, for the time being, we are slightly conservative relative to the market’s projection. This is because there is a contradiction in the economic indicators released by the Mainland in recent months, reflecting uneven recovery momentum. KGI Asia is projecting a possibility of economic growth in China reaching 5.5% or above for 2023, in which the most uncertain factor should be how fast consumer spending recovers.”
Looking forward to further favorable policies
Now look at the messages from the Politburo meeting in April with a keen eye. The meeting mentioned that while some easing in the triple pressures (shrinking demand, supply shocks and weakening expectations) was noted, the Chinese economy remained challenged by inadequate internal dynamics, in the future, proactive fiscal policy must be strengthened to improve efficiency and prudent monetary policy must be precise and powerful to form a joint force to expand demand. We expect the People’s Bank of China (PBOC) may lose monetary policies in the coming three months to stimulate the economy and maintain recovery.
China-U.S. relations are still a source of volatility
We expected the tension between China and the U.S. will continue to be the key focus of the market, as Cui Tiankai, former Chinese Ambassador to the U.S., remarked that the U.S. has come to regard China as its biggest strategic competitor, and that will definitely bring many unstable factors to China-U.S. relations. We will be monitoring relevant developments closely and will timely adjust the economic outlook and investment allocation.
HSI target at 22,100
In the outlook for Hong Kong stocks released at the end of last year, we predicted a target of 21,100 for the HSI in 2023 under the basic scenario. At that time, we estimated the earnings per share of HSI constituents for 2023 to be approximately HK$2,050, up 10.6% YoY. Up till now, companies that had announced quarter results reported a median profit growth of about 11%, meeting our forecast made at the year’s start when the Mainland had not yet announced a full return to normal, whose positive impact, therefore, had not been thoroughly factored into the projected data. We now revise the FY23 HSI EPS to HK$2,085 with a growth of 12.5% YoY.
Meanwhile, we will now use a higher forward P/E at 10.6 by year-end, and we have revised the year-end HSI target to 22,100.
4 Major Investment Themes:
- Dividend pay-out by central state-owned enterprises (SOEs) on a steady rise
- The business of ‘old economy’ companies continue to improve
- New economy stocks at the near-end of the rate hikes
- Gold ETF as recession hedge
| Stock || Target Price |
| State-owned enterprise reform |
| China Mobile (941) || 78 |
| Bank of China (3988) || 3.6 |
| The improving business of ‘old economy’ companies |
| AIA (1299) || 94 |
| CK Infrastructure (1038) || 52 |
| “New economy” near-end of the rate hike |
| Tencent (700) || 400 |
| BYD (1211) || 300 |
| Gold ETF as recession hedge |
| SPDR Gold Trust (2840) || 1600 |
Kenny Wen, Head of Investment Strategy at KGI Asia, says: “As the market has significantly raised its growth forecast for China economy. Investors should continue to follow closely the future economic data and corporate earnings. We believe the central government will continue to implement policies to boost the economy, hence driving the Hong Kong stock market to perform well along with market volatility. In terms of strategy, investors should start with the fundamental factors and build up the portfolio with both aggressive and defensive allocations.
As a semiconductor and server production hub, Taiwan will continue to benefit from the current AI frenzy. Taiex’s seasonality trends will be driven by the manufacturing sector, bolstered by new products and inventory restocking in 2H23, and a favorable base effect pushing up earnings growth. Significant 2H23 earnings growth for Apple concepts will be buoyed by the stocking of new products, while AI prospects underpin a positive view in 2024 for semiconductor and server assembly plants.
The high valuations of these AI beneficiaries can be explained by the tangible long-term structural trend. But we can still build positions when there are valuation adjustments. Taiex’s AI beneficiaries include IC design services, chip foundry and manufacturing, cloud/data centers, and ABF and advanced packaging.
James Chu, Chairman at KGI Investment Advisory, says: “The AI-driven buying frenzy has successfully helped Taiex out of the tight consolidation of the past few months. Moreover, destocking and pull-in demand for new products are paving the way for restocking in the manufacturing industry in 2H23F. Coupled with a favorable base effect that should boost earnings growth, we foresee a run-up tied to seasonality trends. Given a clear secular trend emerging for AI, which has triggered a re-rating for related stocks, AI supply chain sector development should continue to be followed until the economy slips into a recession or AI benchmark stocks weaken markedly.”
With the U.S. and European banking crisis in March, ongoing tensions with China, as well as global recession concerns, Singapore is an ideal haven for Asian capital.
Chen Guangzhi, AVP, KGI Asia at KGI Asia Singapore, says: “Singapore’s overall economy is healthy and robust as the growth in the construction and service sector offset the drop in the manufacturing sector. Inflation remains high, fuelled by the continuous capital and affluent people inflows. The authority has tightened policies to curb the strong demand for family offices and properties.
The banking sector is expected to have another record profit this year due to the increasing wealth management amidst lasting high-interest rates. The robust demand in the real estate market results in rising prices and more new projects.
The Indonesian economy is expected to grow in 2023, with the government targeting annual growth at 4.5%-5.3%, higher than the 20-year average of 3.5%, and reflects recovery from the contraction during the 2020 pandemic. We also expect loan growth to be at 9% in 2023, above the 15-year average of 8%, despite higher rates. To recap, the loan growth went negative in 2021 as businesses were adversely affected by the pandemic. With our positive view on commodity movement for 2023, Indonesia as a commodity exporter is expected to benefit from the robust commodity prices. We believe the trend will continue until 2024.
Yuganur Wijanarko, Senior Analyst at KGI Asia Indonesia, says: “We are optimistic about the Indonesian economy in 2H23 with the catalysts including loan growth to continue despite higher rates, higher commodity prices and better market sentiment awaiting the presidential election year in 2024.”
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