4Q24 key investment takeaways: in a sweet spot | Bahasa

Indonesia, 30 Sep 2024 - 4Q24 Investment Summary  

• Macro Policy

Fed policy pivot marks the beginning of at least 150 bps of rate cuts. ECB easing continues with second rate cut of the year. BOJ normalisation to continue, while further policy support is needed for China.

• Economic Outlook

The Fed’s bumper 50 bps rate cut will shore up the likelihood of a soft landing, as opposed to a recession scenario. Fading momentum in Europe as weak growth persists. Asia exports beat expectations on the global electronics upcycle.

• Equities

Moderating growth and a weaker dollar should benefit more defensive sectors such as utilities, consumer staples, and healthcare. Falling rates to boost ASEAN equities and Asia REITs. 

• Credit

Sweet spot remains in A/BBB credit with duration barbell between 1-3Y credit to mitigate reinvestment risk and 7-10Y credit to capture risk premium and yield spread compression. US MBS and European credit poised to offer strong value plays.

• Rates

Steeper curves for the US and Europe given policy easing mode. The BOJ remains the outlier, implying that the JGB curve is biased towards flattening. Expect falling China Government Bond yields.

• Currencies

A DXY Index below 100 is likely in the next US presidential term, driven by Fed rate cuts amid a soft economic landing. Asian currencies will gain as the region anchors global growth, supported by export recovery.

• Alternatives

Gold set for further highs with impending rate cuts. In private markets, secondaries are seeing a phenomenal rise due to demand for liquidity amid tighter IPO and M&A environments for exit.

• Commodities

Soft commodity prices on slowing economic momentum. Expect a bottoming in oil price on favourable supply demand. Precious metals remain the standout performer.

• Thematic focus: ASEAN equities

ASEAN to benefit as a strategic economic bloc from China+1. Tailwinds from a lower rate and a weaker dollar to sustain strong growth momentum.


Over the past two quarters, we have expounded our case that risk assets were in play. Going into 4Q, risk assets should remain in a sweet spot as the Federal Reserve’s surprise 50 bps rate cut will increase the odds of a soft landing. The combination of easing rates and economic resilience, accompanied by technological advancements driving productivity gains, will be constructive for risk assets.


The bull market in equities is poised to continue, with a broadening to laggard sectors. US Big Tech continues to shine in the growth end of our portfolio – unlike the dot-com boom during the 1990s, the AI revolution today is led by large, profitable businesses funded by free cash flow instead of debt. We maintain that the AI revolution is in its infancy, and continues to hold immense growth potential.


While a soft landing scenario remains our base case, we are cognisant that growth is slowing. To navigate an environment of lower bond yields and weaker top-line demand from waning economic momentum, one should gain exposure to risk assets that capture (i) resilient consumer demand despite overall macro moderation, and/or (ii) benefits from falling bond yields and dollar weakness. They include:

• Defensive sectors: Our analysis of previous rate cutting cycles suggests that Utilities, Consumer Staples, and Healthcare tend to outperform (on a three-month basis) after the initial rate cut. In addition to these sectors’ inelastic consumer demand, the likes of Utilities provide above-average dividend yield of c.3.0% (vs c.1.4% for the S&P 500), which are attractive for income-seeking investors.
• ASEAN equities: Against global headwinds, ASEAN continues to sustain strong growth. Resilient domestic demand backed by tight labour markets and stable prices, robust tourism and a recovery in exports buoyed by China+1 have been key growth drivers. Lower rates and a weaker dollar, alongside China’s new stimulus measures, will bring further tailwinds for ASEAN equities.
• Asia REITs: Asia REITs are prime beneficiaries of rate cuts given their high gearing and sensitivity to funding costs. Lower financing costs as the Fed continues policy easing will enhance the profitability of REITs, and their dividend distributions to investors.
• Gold: Gold has a broadly inverse correlation with the dollar, which is expected to weaken as the Fed continues lowering rates. Escalation of geopolitical tension and continued buying by global central banks will be tailwinds for the haven asset.

From a cross-asset perspective, we continue to maintain a preference for bonds over equities. Longer-duration, investment-grade bonds will provide consistent cashflow on the income end of the barbell portfolio, with potential for capital gains as the Fed embarks on a series of rate cuts. As we transition from a pause to a cutting cycle, bond investors should continue to switch from cash into fixed income.

Key highlights of our tactical calls for the coming quarter are:  

1. Cross Assets – Maintain preference for bonds over income equities

While the gap between US earnings yield and 10-year treasury yields has improved slightly, bonds remain more attractive than dividend equities on a relative basis. While equity fund flows saw marginally stronger momentum in 3Q24, year-to-date fund flow data show bond flows continue to lead, suggesting broad-based preference for bonds on a cross asset basis

2. Equities – Time for ASEAN equities to shine

The performance of equity markets in 3Q reflects major shifts in portfolio positioning as investors adjust their exposures to ride the wave of Fed monetary easing. With further Fed rate cuts and dollar weakness on the horizon, ASEAN equities are poised to outperform.

3. Bonds – Prevailing tight credit spreads not a concern in higher rate environment; maintain “barbell” approach in 1-3Y segment and 7-10Y segments

As the Fed cuts rates, investors may question if current spreads are sufficiently wide to compensate for a potential spike in credit risks as macro momentum moderates. Our analysis shows that in a higher interest rate regime, HY spread tends to be tighter as the central banks have a bigger buffer to cut rates should economic momentum deteriorate, suggesting that spreads valuation may not be as expensive as it seems.


In terms of positioning, the sweet spot remains in A/BBB credit, with duration barbell between 1-3Y credit to mitigate reinvestment risk and 7-10Y credit to capture risk premium and yield spread compression. US MBS and European credit poised to offer strong value plays.

4. Alternatives – Hedge funds and private assets provide source of additional alpha, gold set for further highs

Trudging into an era of uncertainty, investors may do well to consider the use of private assets to improve portfolio diversification and resilience. Recent valuation adjustments in private equity offer attractive entry opportunities for investors, while private credit’s ability to generate stable income through lower default rates makes it an attractive investment instrument.

In the medium to long term, we remain bullish on gold. Themes of fiscal sustainability, monetary debasement, and de-dollarisation are all supportive of structural central bank buying and general investment demand for gold.


4Q24 Global Tactical Asset Allocation (TAA)

 

	Per triwulan	Per tahun
Equities	Underweight	Neutral
US Equities	Overweight	Overweight
Europe Equities	Underweight	Underweight
Japan Equities	Neutral	Neutral
Asia ex-Japan Equities	Overweight	Overweight
Fixed Income	Overweight	Underweight
Developed Markets (DM) Government Bonds	Overweight	Underweight
Developed Markets (DM) Corporate Bonds	Overweight	Neutral
Emerging Markets (EM) Bonds	Underweight	Neutral
Alternatives	Overweight	Overweight
Gold	Overweight	Overweight
Private Assets & Hedge Funds	Overweight	Overweight
Cash	Underweight	Neutral

TAA breakdown by asset class (Medium risk profile) 

Source: DBS 


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